Five steps to beat the Bank of England interest rate rise

Authored on
15 May 2023



The Bank of England has increased interest rates, yet again. At their latest meeting, the UK’s bigwigs who decide what happens to interest rates raised them from 4.25% to 4.5%. That seems like a small increase, but it’s the 12th consecutive increase from the Bank of England and just 18 months ago interest rates were at 0.1%.

There are winners and losers from interest rate rises, but there are ways you can beat the increase – and even benefit from it. Here we go:

Step 1: Move your cash savings

While interest rates have risen, banks are not passing on all of those interest rate rises. The Bank of England and the Government have called banks out for doing this, as they are pocketing some of the interest rate increases rather than offering higher interest rates to savers. But there’s an easy way to fix that: move your savings to a top-paying account.

As a rule of thumb if your savings are sitting in your current account or if you’ve had your savings account for a year or more, you’re almost guaranteed to be able to get a better rate elsewhere. It only takes a few minutes to shop around for a better deal, by going to a comparison website and working out the best option for you. Now accounts can be opened online or via an app, it might only take five or 10 minutes to open a new account, so minimal hassle for potentially high rewards. For example, someone with £10,000 in a savings account earning just 1% who shifts to the top paying easy-access account, which currently pays 3.7%, would make £271 a year in extra interest – worth 10 minutes’ work.

More on our Cash savings hub

Step 2: Don’t fall onto your mortgage lender’s priciest rate

As interest rates have risen, so too has the default rate that mortgage companies charge when you come off a fixed rate deal. These ‘Standard Variable Rates’ (or sometimes called Revert-To rates) are the interest rate that you’ll automatically have to pay if your mortgage deal ends and you don’t have a new one lined up. But they are eye-wateringly expensive. Moneyfacts, which collects lots of data on this kind of thing, says that on average they have risen to 7.3%. And that’s just the average, your mortgage company could charge more than this.

If you’ve got a £250,000 mortgage on a 25-year term and you’re on a rate of 2% at the moment, that increase to 7.3% would mean you pay an extra £755 a month more for your mortgage! If you’ve got a bigger mortgage the difference will be even higher. So get a new mortgage sorted before your current one ends – as even a month on a Standard Variable Rate will hit your pocket.

Step 3: Cut your debt costs

Higher interest rates mean more expensive debt too. So any store cards or credit cards might charge higher interest and new personal loans you take out might charge more too. But there is still lots of cheap debt out there, whether it’s 0% overdrafts or credit cards that charge 0% on new purchases or balance transfers. If you’ve got some debt and it’s cost a lot, take a look at whether you can move it. Take a look at a comparison website and see what deals you could get – just a word of warning that if you have a low credit rating you might find it harder to access cheaper debt. But it’s still worth looking at your options.

Step 4: Consider a fixed-rate account

Fixed-rate savings accounts offer higher interest rates than easy-access options – that’s because you are locking up your money for longer. But you can get far higher rates if you know you won’t need that money in the next year or so. No one really knows when interest rate hikes are going to end, but lots of smart people are predicting that we’re near the end of the rate hikes – which means peak savings rates are on the horizon. That means now could be a good time to lock in that fixed-rate account.

The banks are pretty strict about you not being able to access the money during the fixed period, so make sure you don’t need that money in that time, whether it’s one year, two years or five years. At the moment you don’t get much more interest for fixing for two or five years vs fixing for a year, so you’ll need to weigh up whether it’s worth fixing for longer.

Step 5: Make a decision on tracker vs fixed-rate

After the craziness in the mortgage market last year lots of homeowners who had mortgages coming to an end decided to opt for a tracker mortgage rather than lock in a new fixed-rate deal. And that has proved a smart plan, because mortgage rates have fallen considerably since that mayhem in the market and there are lots more products available too. But since then we’ve had a few more interest rate rises, which immediately get passed on to tracker mortgage customers – meaning their monthly costs will be higher.

For those people, and anyone coming up to remortgage soon, it’s time to make a call about whether you dive back in to the fixed-rate market or sit on the sidelines with a tracker mortgage and hope rates will fall further. This involves a lot of predicting what mortgage companies and the Bank of England will do, which is almost impossible to accurately do. Your best bet is to talk to a mortgage broker who can give you all the sums for different scenarios to help you make your decision. 

These articles are for information purposes only and are not a personal recommendation or advice.