How to Plan for Rising Interest Rates

How to Plan for Rising Interest Rates


You can profit from increasing interest rates by purchasing real estate and selling off unnecessary assets. Short-term and floating-rate bonds are also good choices during rising interest rates since they lessen portfolio volatility. Invest in inflation-proof investments and instruments with credit-based yields to hedge your chances.

Make a budget and see if there are any places where you may save money. If the increases are anticipated to occur in the future, start saving so you’ll be able to afford your mortgage when they do.


Interest rates have a wide range of effects, including mortgages, borrowing, pensions, and savings. The Bank of England determines the bank rate (or ‘base rate’) for the United Kingdom, which is now 5.25% (the rate was last adjusted on August 3, 2023). This, in turn, can affect how much interest you receive on your savings and how much you pay for borrowing money.

What does an interest rate rise mean?

The Bank of England’s (BoE) Monetary Policy Committee (MPC) determines interest rates in the United Kingdom. This is the rate at which banks borrow from the Bank of England.

When you hear that interest rates have risen, it signifies that the MPC has chosen to raise the base rate.



What happens when interest rates rise?

Banks are not required to follow the Bank of England’s interest rate choices, but they can influence the cost of borrowing or the amount of interest earned on savings.

Cut Bond Duration When Interest Rates Are Rising

To begin, investors should minimize their long-term bond exposure while increasing their exposure to short- and medium-term bonds, which are less susceptible to rate hikes than longer-maturity bonds, which lock in higher rates for longer periods. Short-term bonds give less income-generating potential than longer-term bonds, hence switching to a shorter-term lower-yielding bond model has a trade-off.

Pairing short-term bonds with other instruments, such as floating-rate debt, such as bank loans, and Treasury Inflation-Protected Securities (TIPS), whose adjustable interest rate is less sensitive to rising interest rates than other fixed-rate instruments, is one solution to this issue.


“Historically, inflation risk premiums have been solidly positive,” said Geert Bekaert, a business professor at Columbia University. “If future interest rates rise because of higher inflation (e.g., a commodity price boom), and inflation risk is suddenly priced in again, nominal Treasuries will perform very poorly, but TIPS will do well as they are indexed against inflation.”

TIPS are modified twice a year to reflect changes in the Consumer Price Index (CPI) in the United States, which serves as a baseline for inflation. TIPS coupon payments climb in lockstep with inflation. Floating rate loans engage in risky bank loans, the coupons of which float at a spread over a reference rate of interest. As a result, they adjust at regular intervals when rates change.

These two types of funds are among the greatest bond funds to invest in as interest rates rise. Consider the following funds:

  • The Schwab U.S. TIPS ETF (SCHP)
  • The SPDR Barclays TIPS (IPE)
  • The iShares TIPS Bond ETF (TIP)
  • The PIMCO 1–5 Year U.S. TIPS Index ETF (STPZ)
  • The iShares Floating Rate Note Fund (FLOT)
  • iShares by BlackRock. “iShares Floating Rate Bond ETF.”
  • The SPDR Barclays Capital Investment Grade Floating Rate ETF (FLRN)
  • The Market Vectors Investment Grade Floating Rate ETF (FLTR).

Impact of interest rates rise on mortgages

When and whether an interest rate change affects your mortgage payments will depend on the sort of mortgage you have and when your existing arrangement expires.

If you have a variable rate tracker mortgage tied to the Bank of England base rate, an increase in interest rates is likely to have an immediate impact on your mortgage repayments.

Those with a normal variable rate mortgage will almost certainly see their rate climb in tandem with any increase in interest rates. The amount is determined by your lender, thus it is not guaranteed. If you are unclear, consult your original mortgage offer paperwork for your mortgage terms and conditions.

People with fixed-rate mortgages are likely to be affected when their current contract expires. A rise in interest rates may make remortgaging more expensive.

Have a financial plan in place

A financial strategy in place to deal with any anticipated interest rate adjustments is a good idea. The base rate is at its highest in fifteen years, which means you should budget for increased monthly payments if:

  • applying for a new mortgage
  • remortgaging from a fixed rate
  • have a tracker or variable rate mortgage.

This is how much a £200,000 mortgage would increase by at a current interest rate of 2.5% (based on a 25-year term, the current monthly repayment of £897):

New interest rate 5% 6% 7% 8% 9%

Monthly payment






Monthly increase







Leave a Comment