The impact of interest rate changes on mortgages

How is the base rate decided?

The base rate is decided by the Monetary Policy Committee (MPC). The MPC meets around eight times a year to discuss changes to base rate, taking into consideration factors such as inflation, economic growth and UK employment rates.

Once the meeting has taken place, each member of the MPC votes on the decision, with the majority determining the outcome.

Why do interest rates change?

Put simply, interest rates are used to control inflation. If the MPC feels that inflation is rising too quickly, it may try to limit it by raising the base rate. When the base rate changes, so do interest rates.

When interest rates change, the cost of borrowing money (for example, a mortgage loan) may becomes more or less expensive.

How do interest rate changes affect my mortgage?

The impact an interest rate change has on your mortgage will depend on what type of mortgage you have, and when your deal comes to an end.

Variable rate mortgages

If you’re on a variable rate mortgage with a lender whose interest rate changes in line with the Bank of England’s base rate, you may find that the cost of your monthly repayments changes too.

If you have a tracker mortgage, this will definitely be the case. This is because tracker mortgages “track” an external base rate – usually the Bank of England’s.

Fixed-rate mortgages

If you’re on a fixed-rate mortgage, you won’t see any change until the end of the fixed period, at which point you’ll be switched to your lender’s standard variable rate (SVR) unless you remortgage.

If you’re reaching the end of your fixed-term period, it’s wise to speak to your mortgage provider as early as possible. The sooner you speak to your lender, the more likelihood you have of locking in a fixed rate that may potentially protect you from possible interest rate changes in the future.

To find the best deal for your circumstances, it’s advisable to get in touch with your lender at least six months before your fixed-term period ends.

Your provider will find you the best deal they can, but there may be more competitive products elsewhere. This is why it can also be a good idea to seek independent advice from a Specialist Mortgage Adviser if you're thinking of remortgaging.

How to reduce your mortgage interest rate

Knowing how to reduce your mortgage interest rate may feel a little unachievable, but there are a number of things you can consider.

• Assess your loan-to-value (LTV) – If you’ve been paying off your mortgage throughout a fixed-rate period, your LTV bracket may have changed. For example, if your LTV started as 90%, but is now 80%, the interest rate on your new mortgage may be more favourable. You can also decrease your loan-to-value ratio by making overpayments on your mortgage, but it’s wise to speak to your lender to discuss your options.
• Find the right deal for you – A mortgage is one of the biggest financial commitments you’ll make in life, so it’s important to find the right deal available to you. This is where a specialist mortgage broker can help. When choosing a broker, be sure to find one that has access to rates and deals from a range of specialist lenders.
• Get the support you need – If you’re worried about how interest rate changes are going to impact your mortgage plans, speak to a Specialist Mortgage Adviser from Wesleyan Financial Services for expert guidance tailored to you.

Wesleyan Financial Services (WFS) provides broker and advice services. WFS is paid a fee by the mortgage lender upon completion of the loan. Product fees may be payable to the lender.