Interest rates in the UK are on an upwards path, having been at low levels since the financial crisis of 2008. This has steadily been increasing since December 2021, and the Bank of England is forecasting that the base rate will peak above 5.2% this year.1

But what do rising interest rates mean for your money? Please be aware that interest rates will affect everyone differently. The information in this article is correct as of February 2023, but please note that interest and inflation rates are likely to change over time.

Firstly, what does an interest rate rise 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. The Bank of England have been raising the base rate of interest, which guides the interest rates on financial products such as loans and savings accounts. The reason they do this, 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.

Rising interest rates – what does this mean for you? 

1. What does it mean for savers?

Higher interest rates are generally good news for savers. This is because banks usually pass on base rate increases on their savings products, although not always quickly or in full. For example, on 1 January 2022, the average two-year savings bond (a form of fixed-term investment) would have paid you 0.93% interest on a £10,000 balance. A year later, the average interest rate had increased to 3.83%.2

However, when inflation is 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.

2. What does it 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 as 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 9.5% in December 2022 compared to 6.9% 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.

Should you prioritise saving or paying down debt? Our article guides you through what your best options are.

3. 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 1 January 2022 to 1 January 2023, the average interest rate on a two-year fixed residential mortgage deal rose from 2.38% to 5.79%.2 Based on a 90% loan on a £270,000 property repaid over 30 years, this would mean paying an additional £479.21 more on average.4

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.

  1. Monetary Policy Report – November 2022. Data Source, Bank of England, November 2022.
  2. Average Mortgage and Savings Rates. Data source, Moneyfacts. Published 3 January 2023.
  3. Moneyfacts Treasury Reports. Data source, Moneyfacts. Published December 2022.
  4. Mortgage CalculatorInformation was inputted manually. Data source, Moneyhelper, Published 3 January 2023


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