Article What do high interest rates mean for you?

Interest rates in the UK have been steadily increasing over the last few years. Starting at 0.1% in December 2021, it’s slowly risen over time and has stayed at its peak of 5.25% since August 2023.¹

It’s currently expected that interest rates won’t start to fall until Autumn 2024, and when they do this will be a gradual process. This means that higher rates of interest could still have benefits or challenges for some time to come, depending on your personal circumstances.

So what do current rates of interest mean for you and your money? We cover some of the basics:

1. What do ‘interest rates’ actually mean?
2. What do high interest rates mean for savers?
3. What do high interest rates mean for borrowers?
4. How do interest rates affect your rent or mortgage?

The information in this article is correct as of May 2024, but please note that interest and inflation rates are likely to change over time.

1.  What do ‘interest rates’ actually mean?

Interest rates in the UK are set by the Monetary Policy Committee (MPC) of the Bank of England.

When you hear on the news that interest rates have gone up, it means the MPC has decided to increase the base rate of interest. The base rate guides the interest rates on financial products such as loans and savings accounts. The reason the base rate is increased is to try to dampen inflation. 

Higher interest rates make it more expensive to borrow and encourages saving – so generally, there will be less money for people and organisations to spend on goods and services. With less spending power in the economy, prices tend to rise more slowly, reducing inflation.

It’s a delicate balancing act – if people aren’t spending or are struggling to buy homes as borrowing costs rise, this can cause the economy to slow too much.

2. What do high interest rates mean for savers?

Higher interest rates are generally good news if you’re putting money into savings. This is because banks usually pass on base rate increases on their savings products, although not always quickly or in full. For example, in September 2022, the average rate on a one-year savings bond (a form of fixed-term investment) was 2.29%.² A year later, the rate had increased to 5.34%. On a lump sum investment of £20,000, that equals an extra £610 in interest after one year.²

However, when inflation is also high, the value of your cash savings in real terms (factoring in inflation) is reduced, meaning the spending power of your savings will be less. This is because the interest you earn isn't likely to keep pace with the rate of inflation. This might make holding larger amounts of money in a cash savings account seem less attractive.

3. What do high interest rates mean for borrowers?

If you’ve already taken out a personal loan, the rate will usually be fixed for the duration of the loan term. This means you shouldn’t see your rate go up if the base rate rises.

However, if you’re looking at taking out a loan in the future, you may find that the rates available on loan products across the marketplace are higher. For example, the average interest rate charged on a £5,000 unsecured personal loan repaid over three years was 10.6% in September 2023 compared with 7.7%% one year before.³ Bank overdrafts and credit cards can also be influenced by the main rate of interest so you could end up paying more interest if you have these forms of borrowing.

Our article, Should you save or pay down debt? guides you through what your best options are.

4. What does it mean for my rent or mortgage?

If you have a tracker or variable rate mortgage, the monthly repayment will usually go up in line with increases to the base rate of interest. If you’re on a fixed-rate mortgage deal, you might find that the deals on offer are more expensive when your term ends and you come to remortgage.

From December 2021 to December 2022, the average interest rate on a two-year fixed residential mortgage deal rose from 2.34% to 6.01%.⁴ Based on a 90% loan on a £300,000 property repaid over 30 years, this would mean paying an additional £576.02 a month more on average.⁵

If you’re renting, your landlord’s mortgage costs will likely be going up – and this could end up being passed on to you in the form of rent increases. This article from Citizen’s Advice includes information on how to deal with an increase in rent.

Consider speaking to a financial adviser

As we’ve covered, interest rates will affect everyone differently. If you’re worried about how higher interest rates could affect your finances, a financial adviser can help you, based on your individual circumstances. If you don't have a financial adviser, you can visit MoneyHelper to find the right one for you. Please be aware that there’s usually a cost for speaking to a financial adviser.