The Bank of England last week announced a rise in interest rates bringing them to the highest level in 15 years, prompting concern over potential increases in mortgage payments. 

Mortgages in Scotland are affected since the Bank of England is responsible for UK-wide monetary policy.

Interest rates have increased 14 times in a row since December 2021 in an attempt to slow down inflation. 

According to the Office for National Statistics (ONS), inflation rose by 7.9% in the year to June, which is almost four times the Bank’s target of 2%.

The purpose of raising interest rates is that by making it more expensive to borrow, people will spend less money and as a result demand and inflation will come down. 

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Chartered Financial Planner Ben Stark explained to The Herald what the Bank of England’s announcement may mean for mortgages:

Why are interest rates rising?

Interest rates are rising because inflation has increased hugely over the last two years and the main tool the Bank of England has to bring it under control is to raise interest rates.

Why do interest rates affect mortgages?

Most mortgage rates that banks charge are linked one way or another to the Bank of England base rate. That means that when the base rate goes up, the cost of borrowing increases, and with it mortgage rates. 

How much can people expect mortgages to increase by?

It’s difficult to say and no one has a crystal ball. From the discussion last week, mortgages are likely to increase by a little, but are unlikely to be significant unless some new challenge or new shock comes in. 

The BBC reports that the interest rate rise from 5% to 5.25% means that those on a typical tracker mortgage would see an increase of around £24 per month, while for those on a standard variable rate (SVR) the increase would stand at around £15. 

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When will we see mortgage rates come down?

It’s difficult to say. The Bank of England said they think inflation will be back down below 2% two years from now. They think it will be above 2% until mid-2025. 

Bank of England governor, Andrew Bailey, has said that interest rates will remain higher for longer - until inflation lowers. 

Stark’s best tip is that people who want to know exactly how interest rates will affect their mortgage should go and seek advice - for example those on a fixed rate who may not be affected immediately, but want to plan ahead. 

Ben Stark is a Chartered Financial Planner. He writes The Herald’s weekly Money HQ newsletter, which delivers advice and insight to help make your money matter every Monday. You can subscribe here.