We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us
  • A A A
  • UK interest rates rise to 4.25% by Bank of England – what it means for annuities and mortgages

    With the Bank of England raising interest rates by 0.25% to 4.25%, we take a closer look at the impact on annuities and mortgages.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    This article is more than 6 months old

    It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

    Interest rate expectations in the past week have ended with a 0.25 percentage point rise to 4.25%. Worries of the impacts of a rate rise on the banking sector meant many were expecting rates to stay the same. However, it turns out that for the Bank of England (BoE), inflation is still the priority.

    Given, the surprise rebound in inflation, the BoE had little choice but to keep raising rates. And while you might well ask why shortages of cucumbers should mean higher monthly mortgage payments, even when volatile food and energy prices were stripped out, core inflation was also up from 5.8% last month to 6.2%.

    This was enough to persuade the BoE that rising prices are more of a threat to the economy than the woes of handful of US and Swiss banks. It took the opportunity to underline yet again that the UK banking system remains resilient.

    Banking shares: what's causing volatility in the banking sector?

    What this means for mortgages

    The impact the rate rise will have on mortgages owes a little to the fact that things were far less certain in the run-up to this rate announcement than they’ve been in recent months.

    First we had the BoE talking up the prospects of more rate rises on the way. Then we had question marks over whether they would been keen to hike rates if it might undermine confidence in the banks. And finally inflation figures brought us back to square one, with the market firmly expecting a rise.

    It means that while we’ve seen some small fluctuations in the past week, the banks weren’t entirely clear on the kind of change they were pricing in. So we could see a little more reaction than we have after previous rate hikes.

    Now rates have risen, for variable rate mortgages, the changes are likely to be swift and horrible. For fixed rates, on the other hand, we’re not expecting this rise to have a significant impact on the overall downward trajectory of mortgage rates during this year.

    The Bank is still confident that inflation will fall significantly after June. It actually expects that fall to be steeper now, especially now that gas prices are expected to be so much lower at that point. It means we can expect the rate hiking cycle to be near an end.

    And depending on how far and how fast rates fall, we could see rate cuts on the horizon. This is what the banks will have in mind when pricing fixed deals, which will push rates down.

    For those on variable rates, who are wondering whether to fix, it causes a bit of consternation. Holding on in a variable rate mortgage has proven increasingly expensive, and we can’t guarantee this is the last of the increases.

    The Bank said the market expects rates to rise as far as 4.5% before dropping again. However, the longer you wait, the more of a chance there is that fixed rates will fall, so you could get a better deal at the end of it.

    In the end it will come down to whether you can face the risk of more rises in the short term in return for a better deal further down the line. Some people will have the wiggle room and the nerve. Others need certainty over what’s likely to be their biggest monthly outgoing.

    What this means for annuities

    After years in the doldrums, annuities enjoyed a crazy ride in 2022 as incomes soared off the back of rising gilt yields. They hit a real high in the aftermath of the mini-budget before drifting slowly downwards and so far, this year they’ve remained fairly flat.

    An interest rate increase could provide a boost to rates. However, there’s also the chance any increase has already been priced in given the Bank’s much publicised comments on the future direction of interest rates.

    Incomes might have reduced from the dizzy heights achieved in the weeks following the mini-budget last autumn. But they remain much higher than where they were two years ago when record-low interest rates kept them pegged back. Ultimately, they offer significantly better value today than they have for years.

    Explore annuities

    This article isn't personal advice. If you're not sure what's right for your circumstances, seek advice.

    Editor's choice: our weekly email

    Sign up to receive the week’s top investment stories from Hargreaves Lansdown

    Please correct the following errors before you continue:

      Existing client? Please log in to your account to automatically fill in the details below.

      This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.


      Your postcode ends:

      Not your postcode? Enter your full address.


      Hargreaves Lansdown PLC group companies will usually send you further information by post and/or email about our products and services. If you would prefer not to receive this, please do let us know. We will not sell or trade your personal data.

      What did you think of this article?

      Important notes

      This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

      Editor's choice – our weekly email

      Sign up to receive the week's top investment stories from Hargreaves Lansdown. Including:

      • Latest comment on economies and markets
      • Expert investment research
      • Financial planning tips
      Sign up

      Related articles

      Category: Pensions

      Property and pensions – will your rental income be enough in retirement?

      Rent prices have increased to record highs, but what does it mean for landlords who are banking on that income for retirement?

      Alex Mears-Jennings

      31 Oct 2023 3 min read

      No results were found

      Cash vs investing – where should investors look when the interest rate cycle turns?

      With the interest rate cycle nearing its peak, we look at cash versus investing in the stock market, and where investors could look for opportunities.

      Emma Wall

      27 Oct 2023 6 min read

      Category: Pensions

      How long will my pension last?

      With the number of people living to 100 reaching a new record high, we look at different strategies for making your pension last as long as your retirement.

      Isabel McDougall

      26 Oct 2023 3 min read

      Category: Markets

      Next week on the stock market

      What to expect from a selection of FTSE 100, FTSE 250 and selected other companies reporting next week.

      Sophie Lund-Yates

      06 Oct 2023 4 min read