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	£1,170	£1,289	£1,414	£1,544	£1,678
Monthly increase	£273	£392	£517	£647	£781

Four tips for managing an interest rate rise on your mortgage

Find out what mortgage you’re on

Work out how an interest rate rise will affect you

Work out what you can afford

If you’re worried about how to afford this

If you’ve missed one or more mortgage payments

Build up your credit score

Make sure you’re on the best deal

Overpay your mortgage

Beware of Inflation Hedges

Bet on the US Dollar

Look to Stocks

Use Bond Ladders

Reduce Your Risk

Refinance Your Home

1. Find out what mortgage you’re on

The impact of an interest rate increase on you depends on the type of mortgage you have and when your contract expires. If you’re unsure, examine your papers or speak with your mortgage provider. Read our guide to learn more about the many types of mortgages.

2. Work out how an interest rate rise will affect you

Now that you know what mortgage you have, you can determine how it will influence your finances and when you may expect to notice a difference. Calculate the impact with the Money Saving Expert Calculator.

3. Work out what you can afford

Determine whether you can afford an increase in your mortgage payments if they are going to rise. 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.

4. If you’re worried about how to afford this

Speak with your lender. For the measures you can take right now, see our advice on Talking to Your Creditor.

You can also look into government assistance if you are unable to pay your mortgage.

5. If you’ve missed one or more mortgage payments

Speak with a debt counselor; they can help you budget and examine your income and spending before you fall into financial trouble.

To locate free debt counsel, use our debt advice finding tool.

6. Build up your credit score

It may seem strange to be focusing on this at this time, but by striving to increase your credit score, you will be able to get a better bargain when your term expires or you remortgage.

7. Make sure you’re on the best deal

If your current contract is about to expire, you should consider switching to ensure you’re getting the greatest pricing. However, if you have some time left on your existing contract, it may be worth checking into. You may have to pay some fees, but if the savings outweigh the costs, you should move. Read our page on routinely evaluating your mortgage for additional information on comparing mortgage deals.

8. Overpay your mortgage

It may be some time before an increase in interest rates hits you in the pocket, so take advantage of the current low rate and pay more. There are restrictions to how much you can overpay, and there may be fees, so check with your mortgage provider first. Visit our mortgage payoff website for more information.

9. Beware of Inflation Hedges

When interest rates are low and inflation is high, tangible assets such as gold and other precious metals perform well. Unfortunately, when interest rates begin to climb, investments that hedge against inflation tend to perform poorly because higher rates reduce inflation.

In a high-interest environment, the prices of other natural resources, such as oil, may also fall. This is bad news for individuals who directly invest in them. Investors may consider reallocating at least some of their holdings in these securities and instead investing in stocks of companies that consume them.

10. Bet on the US Dollar

Those who invest in foreign currencies may desire to increase their holdings in Uncle Sam. When interest rates begin to rise, the dollar often gains momentum against other currencies because higher rates attract foreign capital to dollar-denominated investment instruments such as T-bills, notes, and bonds.

11. Look to Stocks

Fixed-income securities are not the only ones that profit from higher interest rates. Investors hoping to profit when interest rates rise can consider buying stocks from key raw material consumers.

When interest rates rise, the price of raw commodities frequently remains steady or falls. Companies that use these materials to make a finished product or just in their day-to-day operations will see their profit margins rise as their expenses fall. As a result, these enterprises are commonly regarded as a hedge against inflation.

Rising interest rates are also excellent news for the real estate sector, so companies that earn from home development and building may be good investments as well. When interest rates rise, poultry and beef farmers may find increased demand as a result of increased consumer spending and lower expenses.

12. Use Bond Ladders

The bond ladder is, of course, a popular method that financial planners and investment consultants offer to their customers.

A bond ladder is a series of bonds that mature at set intervals, such as three, six, nine, or twelve months. When interest rates rise, each of these bonds gets reinvested at the new, higher rate. The same procedure applies to CD laddering. This procedure is illustrated in the following example:

Larry has $300,000 in a money market account that pays less than 1% interest. His broker tells him that interest rates will most likely begin to rise in the coming months. He plans to transfer $250,000 of his money market portfolio into five separate $50,000 CDs that would mature every 90 days beginning in three months.

Larry reinvests the maturing CD into a higher-paying CD every 90 days. He can invest each CD into another of the same maturity, or he can stagger the maturities based on his cash flow or liquidity needs.

13. Reduce Your Risk

As interest rates rise, more conservative instruments will begin to pay higher rates. Furthermore, as interest rates rise, the values of high-yield securities (such as junk bonds) tend to fall more sharply than those of government or municipal issuers. As a result, when compared to low-risk alternatives, the dangers of high-yield instruments may eventually offset their greater yields.

14. Refinance Your Home

It is prudent to keep your fixed-income portfolio liquid, just as it is prudent to lock in your mortgage rate before it rises. If you are eligible to refinance your home, now is most likely the moment.

Also, improve your credit score by paying off modest obligations and visiting your bank or loan officer. Locking down a 5% mortgage and earning an average yield of 6.5% on your bond ladder is a low-risk approach to guaranteed income. It’s also a good idea to lock in low rates on other long-term debts, such as your car loan.

Impact of interest rates rise on borrowers

An increase in interest rates could have an impact on other types of borrowing (non-mortgage), both secured and unsecured. This could include any existing borrowing, such as loans, credit cards, and overdrafts.

If you’re already borrowing

On future borrowing

1. If you’re already borrowing

Most unsecured borrowing, such as a personal loan or financing to buy a car, is unaffected by changes in interest rates. This is because when you took out the loan, you agreed to a set rate of interest.

The interest rate on your credit card or overdraft may also rise, however this is not directly related to any change in the BoE base rate. Subject to the terms and conditions of your account, you will be notified before this occurs.

You have 60 days to cancel the credit card and repay the outstanding balance. Any additional interest accrued during this period will be charged at the reduced rate.

2. On future borrowing

If you want to get a personal loan following an interest rate increase, you may find that the cost of fresh borrowing has gone up.

Impact of interest rates rise on savers

When interest rates rise, it is not all bad news. If you are a saver, you may see an increase in the interest rates on variable-rate savings accounts and Cash ISAs.

Banks and building societies will compete to give the greatest savings account interest rates. This means it’s critical to browse around to ensure you’re getting the best interest rate on the proper account for you.

Interest rates rise and pensions

Rising interest rates can be excellent news for anyone looking to purchase an annuity. Annuity rates are tied to gilt yields and provide a guaranteed income for life or a certain period. Because the income you get might be locked in on the day you buy your annuity (subject to indexing and other factors), current annuity rates can make a significant difference in your long-term financial security.

If you want to buy an annuity, an increase in interest rates can be really good news because it implies you’ll get a higher rate of return. More information can be found in our guide Guaranteed Retirement Income (annuities).

People who have already purchased an annuity cannot switch; however, you can still profit from higher interest rates by transferring the annuity funds to a savings account.

In conclusion

Interest rates will not remain low indefinitely, but the rate at which they will rise and how far they will rise is impossible to forecast. Those who ignore interest rates risk missing out on substantial profit opportunities in a rising rate environment.

Investors can profit from rising interest rates by purchasing equities in companies that consume raw materials, laddering their CD or bond portfolios, boosting their dollar positions, and refinancing their residences. Consult your financial advisor for further information on how to profit from rising interest rates.

How to make money when interest rates are rising?

What goes up when interest rates are high?

Rising interest rates often increase the cost of all debt while increasing income for savers. Stocks, bonds, and real estate may all lose value as interest rates rise. You can take defensive measures to help prepare for difficult economic times while also increasing your overall financial situation.

Is it good when interest rates go up?

Higher interest rates may dampen inflation, resulting in cheaper prices for everything from gasoline to housing. A more powerful dollar. Higher interest rates usually result in a stronger dollar, which lowers the price of imported goods and makes it cheaper for Americans to go abroad.

Do banks make more money when interest rates rise?

A rise in interest rates boosts a bank’s earnings automatically. It raises the amount of money earned by the bank by lending its cash on hand at short-term interest rates.

Who makes more money when interest rates rise?

The victorious. Unsurprisingly, higher rates favor bond buyers, lenders, and savers in the early days. Bond yields, for example, tend to rise even before the Fed raises rates, and bond investors can earn more without incurring greater default risk because the economy remains robust.

How to Plan for Rising Interest Rates