Are interest rates rising and what does it mean for me?

Are interest rates going up?

Although interest rates are currently above the typical 4-5% mark and we have seen some recent rises, there are other lenders that have been cutting deals. The average 2-year fixed rate mortgage is now 5.48%, while the average 5-year fixed rate is 5.26%, but we could see this average come down over the coming weeks following the recent inflation data. The most figure puts inflation at 2.5% - 0.1% lower than the month before and lower than the market was expecting. This could mean that the Bank of England chooses to cut the base rate when they next meet in February. If this happens, this should cause mortgage lenders to also reduce their own rates.

Plus, what rate you'll be offered right now is also impacted by your downpayment and eligibility. For borrowers with a 10% deposit for example, the best available rate from our panel of 100 lenders is 4.59% for a 5-year fix - significantly lower than the average rate.

*Based on 90% LTV, with a 35-year mortgage term. Interest rates are accurate as of January 2025.

Why are interest rates high?

Interest rates are higher than the typical 4-5% because the Bank of England repeatedly voted to keep the base rate high - currently it stands at 4.75%. This is to curb inflation - keeping the base rate high increases borrowing costs, making loans more expensive. This was intended to reduce our disposable income so that we all spend less on goods and services. This reduction in demand then means companies reduce prices, or at least not increase them as quickly, which in turn brings inflation down. By keeping the base rate high, the Bank of England also increases the amount it charges other banks to borrow money. Because it's more expensive for them to borrow money, banks typically increase their own interest rates as a result.

Why is the base rate high?

The base rate increased multiple times over 2023 and was only cut twice in 2024, all because the Bank of England was trying to stop consumers from spending and borrowing as much. By keeping the base rate high the Bank of England has been trying to slow down consumer activity, which means companies can’t increase their prices so quickly. So far this has been working, reducing inflation from the 11.1% peak in October 2022 to 2.5%. Plus, the surprise drop in inflation in December has now opened up the possibility of a base rate cut in February when the Bank's MPC next meets.

How high will interest rates go?

Despite rising slightly over the last few months, inflation has recently dropped by 0.1% - from 2.6% in November 2024 to 2.5% in December 2024. If this continues for the rest of 2025, interest rates shouldn't go up, and instead should come down. However, it’s likely we won’t see sub-4% mortgage deals as standard until the end of 2025 or even longer.

How do rising interest rates impact first-time buyers?

When interest rates rise, this makes mortgages more expensive as it increases the amount of interest you pay each month alongside paying off your mortgage loan. If you're a first-time buyer, higher interest rates might mean that you have to borrow less for a mortgage in order to afford the monthly repayments or put down a larger deposit to get a lower LTV. If you're still saving towards your first home, high interest rates can be a good thing however if saving rates are also high, as you could earn more money on your savings.

If you're struggling to save for a house, don't worry. Set up a Cash Lifetime ISA with us today to benefit from our market-leading 4.8% AER (variable) interest rate, plus a free 25% bonus from the government. There are also ways to buy a home with a small deposit, as well as schemes that help you boost your deposit size.

You might also like: Best mortgages for first-time buyers

Learn more about how interest rates work in our What are mortgage interest rates? guide.

How do rising interest rates impact homeowners?

If you already own a home, the rising interest rates will only impact you if you are coming to the end of your current fixed rate deal and are looking to remortgage, or you are on a variable rate. The average household looking to remortgage in 2025 could see a £2,900 increase to their repayments. This is why finding the best deal possible for you is vital, as it can help mitigate the potential rise in mortgage costs.

The good news is, if you're struggling to remortgage you're in the right place. At Tembo, we're experts in helping homeowners increase their affordability so they can access lower interest rates and stay in the home they love. To find out what remortgage rates you could get, create a free Tembo recommendation, personalised to you.