Inflation measures how fast prices rise, and the Bank of England raises or lowers its base rate to keep us either spending our money or saving it. Because lenders take their lead from the base rate, these changes can affect how much you pay for your mortgage. This guide explains how, and what it means for your payments.
“Inflation and interest rates sound complicated, but the idea is simple. When prices rise too fast, rates tend to go up to cool things down. That’s it – no economics lessons needed!
What matters for you is knowing how this affects your mortgage, if it does at all, and when your deal ends and what your options are. Ask your adviser if you don’t understand anything, we can explain it in plain English.”
Rachel Geddes
Strategic Lender Relationship Director
Why do interest rates and inflation change?
Interest rates and inflation go up and down as part of an economic balancing act which aims to keep the UK economy on track.
This might sound a bit complicated. But don’t worry, you don’t need a degree in economics to understand what’s going on and how it affects you. Once you get your head around inflation, the rest will click into place.
What is inflation?
Inflation is just a word for “prices going up over time”.
When inflation is high, the same weekly shop, tank of petrol or takeaway costs more on average than it did a year ago. When inflation is low, prices are more stable. That’s because inflation shows the average overall price change.
Say a loaf of bread costs £1.00 this year and £1.03 next year. That's 3% inflation on that specific item. Basically, when inflation is high, your money buys a little less than it did before. Don’t get us started on Freddos!
If prices to rise too quickly, everything becomes too expensive. That's how inflation affects interest rates: when prices climb too fast, the Bank of England raises the base rate to try to cool things down. Essentially, raising the base rate makes borrowing more expensive. So people spend less and this helps bring inflation down. The cost-of-living crisis that started at the end of 2021 was all about high inflation.
How inflation is measured
The UK’s main measure of inflation is CPI – the Consumer Prices Index.
To work it out, the boffins at the Office for National Statistics (ONS) track the prices of a “basket of goods”.
This basket includes everyday things people actually buy, such as:
Food and drink
Clothing
Energy bills
Travel and transport
Leisure and services
They compare how much this basket costs now with how much it cost a year ago. If the basket is 3% more expensive, CPI inflation is 3%.
The basket is updated every year, so it reflects how people really spend. For example, air fryers entered the chat in 2024. A decade ago, no one had ever heard of them.
Why the target is 2%
The government asks the Bank of England to keep inflation at 2%. So why not zero? Well, a little inflation is a sign of a healthy economy. If prices were falling, people might put off buying things, and that can slow everything down.
Around 2% is seen as a ‘sweet spot’ – prices rise gently, but not so fast that it hurts households and businesses.
What's driving inflation right now?
In recent years, inflation has been heavily influenced by:
Energy prices: The conflicts in the Middle East and Ukraine have pushed oil and gas prices up, meaning gas, electricity and fuel prices have jumped.
Global events: Conflicts, supply chain problems and changes in global demand can all affect the price of energy, food and goods we import.
These global factors are one reason inflation can rise even when things at home feel steady.
What is the Bank of England base rate?
The Bank of England base rate (often called “bank rate”) is the UK’s key interest rate.
It’s the rate the Bank of England charges commercial banks when they borrow money from it. That makes it the starting point for many other interest rates in the economy.
It's currently 3.75%.
Who sets it
A group of economists at the Bank of England called the Monetary Policy Committee (MPC) decides.
The MPC has nine members.
Each member gets a vote – raise, cut or hold the base rate.
They look at data on inflation, growth, jobs and global events.
Their main job is to keep inflation low and stable, close to that 2% target.
In September, the MPC voted 6–3 to keep the rate at 3.75%. Three members wanted to raise it to 4%.
How often it's reviewed
The MPC usually meets around eight times a year.
Each meeting can lead to a change in the base rate – or a decision to leave it where it is. That’s why you often see headlines about “the Bank of England’s latest interest rate decision”.
If something big happens, there might be an emergency meeting. This last happened during the Covid pandemic.
Why does raising interest rates help bring inflation down?
It can feel odd: prices are rising, so the Bank of England makes borrowing more expensive. So why does raising interest rates reduce inflation? Here's the logic.
Higher rates make borrowing more expensive
When the base rate goes up:
Mortgage payments on many variable and tracker deals rise.
Loans and credit cards often become more expensive.
Business borrowing costs increase too.
This means more of people’s income goes on debt repayments, and less is left for other spending.
Saving becomes more attractive
Higher interest rates can also mean:
Better returns on savings accounts
More reason to save rather than spend
When people and businesses spend less, demand in the economy cools. Shops and companies find it harder to raise prices, and inflation tends to fall.
In short: higher interest rates are used as a brake on inflation. Lower rates are used as an accelerator when the economy needs people to spend.
Why don't mortgage rates always follow the base rate?
You might expect your mortgage rate to move exactly in line with the base rate – but it doesn’t always work that way.
That’s because lenders look at more than just the Bank of England’s decision. So, what affects mortgage rates? Mainly the following:
The base rate,
Swap rates (more on that shortly),
Inflation; and
Competition between lenders
Lenders like banks and building societies price their fixed rate mortgages on what they expect to happen to rates in future, not just on today's base rate. That's why the fixed rates on offer can move, even when the Bank of England leaves the base rate alone. Only tracker mortgages move in step with the base rate.
Swap rates and market expectations
Lenders borrow money to lend to you. Swap rates are the prices they pay to lock in those borrowing costs for a set time, such as two or five years. Swap rates change daily. They move with what the markets expect to happen to inflation and the base rate.
If the news points to higher interest rates, swap rates go up too, and lenders make their fixed rate deals more expensive as a result. The same works in reverse, so when swap rates fall, fixed rates often follow. Competition between lenders matters too, as it can make some deals cheaper than others.
What does this mean for your mortgage?
Does inflation affect mortgages? Yes, indirectly. How much depends on the type of mortgage you have and where you are in your deal.
Fixed rate
Your payments stay the same until your deal ends. So a base rate change doesn't affect you. The big moment comes when your deal ends and you need a new rate.
Tracker and standard variable rates (SVR)
A tracker rate moves with the base rate. It's usually the base rate plus a set amount. For example, with a tracker at the current base rate of 3.75% +1%, you'd pay 4.75% today. If the base rate went up by 0.25%, you'd pay 5%. On a £200,000 repayment mortgage over 25 years, that would go up by around £29 a month.
A standard variable rate (SVR) is set by your lender. It tends to follow the base rate, but your lender decides when and by how much. SVRs are often higher than the deals you can get by remortgaging.
If your deal is ending soon
If your fixed rate ends soon, you may be wondering whether to remortgage now, in case rates rise again, or wait and see, hoping rates fall.
At the end of the day, there’s no one-size-fits-all answer for this. It really depends on:
Your current mortgage rate
Your loan-to-value (how much you owe compared with your property value)
Your income and future plans
A mortgage adviser can help you compare deals so you can weigh up your options.
You can also try our remortgage calculator to see what different rates could mean for your payments.
If you're buying
If you’re a first time buyer, all this can feel like a lot.
The key points are:
Inflation and interest rates move over time – it’s normal.
The base rate influences mortgage rates, but doesn’t set them directly.
Fixed rates are influenced by market expectations as well as today’s base rate.
Weigh up a fixed rate vs tracker: do you prefer certainty or flexibility? Work out what monthly payment you can comfortably afford. Then get advice on which deals fit your budget and risk appetite.
What happens next with interest rates?
Will interest rates go up? Nobody knows for sure, and that includes the experts. Though the Bank of England has said that it expects inflation to keep rising over the coming months, mainly because of energy prices.
A few things will shape what happens next:
Energy prices and events abroad.
How quickly wages rise.
Whether services prices, such as eating out and travel, start to ease.
Rather than trying to “time the market” perfectly, it’s usually better to:
Understand the direction of travel for rates and inflation.
Check how a change would affect your monthly payments.
Make a plan that works for your household budget, with a bit of breathing room.
How a Mab adviser can help
You don’t have to decode inflation reports and interest rate forecasts on your own.
A Mab adviser can:
Explain your options in clear, simple terms
Compare fixed, tracker and variable deals from across the market
Show you what a rate change would do to your monthly payments
Help you decide whether to remortgage now or wait
Support you if you’re a first time buyer trying to make sense of the news
Ready to chat? Our advisers are ready to call you back today. The first chat costs nothing and is totally free of obligation.
Something to bear in mind...
Frequently asked questions
Yes, indirectly. Inflation influences the base rate and swap rates. Those determine the rates lenders offer. If you're on a fixed rate, you'll feel it when your deal ends. If you're on a tracker or SVR, you may feel it sooner.
It's hard to say. The Bank of England expects inflation to rise in the coming months, and some MPC members voted for a rate rise in September. But the decision depends on the data. An adviser can talk you through your options.
If your deal ends in the next six months, it's a good idea to speak with an adviser. Many lenders let you lock in a rate months ahead. If rates fall before your deal ends, you can often switch to a cheaper one.
The main things are the base rate, swap rates, inflation, and competition between lenders. Your own situation counts too, including your deposit size and credit history.
Higher rates make borrowing cost more and saving pay more. People spend less, businesses sell less, and price rises slow down.