Navigating Rising Interest Rates: 7 Frequently Asked Questions Answered

July 25, 2023

Unless you’ve managed to completely disengage with real life (and we don’t really blame you at the moment!), you won’t have missed the fact that interest rates have been on the rise here in the UK. The latest increase at the end of June saw the Bank of England raise the base rate from 4.5% to 5%. That’s the highest level in 15 years.

Despite inflation rates finally taking a tiny dip in June, many are still predicting that interest rates could go still higher before we see things settle down again.

These rising interest rates have resulted in a slew of headlines, from mortgage rate nightmares to why banks are not passing those rates on the savers. For many younger people in particular, this will all be unchartered territory and it’s no wonder that many people are concerned, confused and unsure as to what to do for the best.

In this article, we’ve attempted to answer some of the common questions we’ve been asked recently as financial advisers to help you navigate through this testing time.

1. How do rising interest rates affect borrowing costs?

When interest rates increase, borrowing becomes more expensive. This means that loans for mortgages, car purchases or personal loans will come with higher monthly payments or longer repayment periods. It’s important to consider these changes when planning your budget or considering new debt. If interest rates continue to rise, will you still be able to afford your repayments?

2. What impact do rising interest rates have on savings accounts?

While higher borrowing costs may be a disadvantage for borrowers, savers can benefit from rising interest rates as they often lead to increased returns on savings accounts and fixed-income investments like bonds. It can be an opportunity for individuals looking to grow their savings over time.

Having said that, several banks have been criticised recently for being very slow to respond in passing these increased interest rates on to their savers. Rather than assuming that your savings will be rewarded, it may pay to shop around and find a better rate.

3. Is cash better than stocks when interest rates rise?

The financial markets have been something over a rollercoaster in the past year or so. Despite the slow response by some banks in passing on the higher interest rates, some are beginning to catch up, with rates of over 5% now available. So, is it better to focus your assets on the low-risk world of cash rather than the stock market?

It may be tempting, but throughout history, the stock market has always outperformed cash over the mid- to long-term. The stable, predictable returns from cash may sound good now, but it often fails to keep pace with inflation meaning the actual return is much less certain.

The stock market still represents the best opportunity for higher returns and long-term wealth accumulation – as long as you have a well-managed portfolio.

4. How should I approach investing during times of increasing interest rates?

Rising interest rates can impact different investment sectors differently. Diversification is key in managing risk. Historically, sectors like utilities and property have been negatively affected by rising rates, while sectors such as financials and energy have performed well.

When markets are unstable, investors become more likely to make emotionally-charged decisions about their portfolios. It’s vital to keep in mind your long-term goals. By all means, review your investment portfolio with your financial adviser to ensure it still aligns with your risk tolerance and objectives. But listen to their advice and be prepared to sit tight!

5. Should I overpay my mortgage or invest?

Whilst interest rates have been low, with mortgage rates reflecting that, you could often get a better return by investing any spare cash compared to the savings you’d make by reducing your mortgage debt.

However, with average mortgage rates now sitting at around 6% with the potential to rise further still, it may be worth overpaying your mortgage instead. By overpaying your mortgage, you reduce the debt more quickly, and therefore reduce the interest you pay. Overpaying could also help you reduce your loan-to-value amount, giving you access to better mortgage deals.

However, it’s important to balance these potential benefits with possible downsides. Firstly, make sure you check whether there are any penalties for overpaying your mortgage. Many deals will let you overpay a certain amount each year without penalty, but it’s important to read the small print.

The other disadvantage of overpaying your mortgage is that you lose access to that cash. So, if your circumstances change and you need some emergency funds, you do not have the flexibility to get them back. If they’re in a savings account or investment portfolio, however, you can usually access funds if you need them.

6. Do interest rate rises change how I should draw my pension?

One of the interesting side-effects of the increasing interest rates is the increase in annuity rates thanks to higher bond yields. Annuities fell out of favour when new pensions freedoms were introduced in 2015. However, with annuity rates hitting a 14-year high, they are once again an option at retirement.

The right approach to retirement income is very much a personal thing. Decisions should be made with the help of a financial adviser, particularly when it comes to annuities.

7. What steps can I take to protect myself from rising interest rates?

To safeguard yourself from the impact of rising interest rates, consider the following strategies:

a) Pay down high-interest debt: Prioritise paying off credit card balances or other high-interest loans as they become more expensive with increasing interest rates.

b) Build an emergency fund: Having a safety net of savings will help you avoid relying on credit during unexpected expenses or periods of economic uncertainty.

c) Review your investments regularly: Stay informed about market trends and consult with a financial adviser to ensure your investment strategy is aligned with changing economic conditions.


As interest rates rise, it’s crucial to stay informed and make proactive decisions regarding borrowing, saving, mortgages, investing, and protecting yourself financially. By understanding how these changes affect various aspects of personal finance, you can navigate through this period confidently. Remember that seeking guidance from a trusted financial adviser is always beneficial, especially when making important financial decisions during times of fluctuating interest rates.

This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice. The value of investments can fall as well as rise. You may not get back what you invest.