The Bank of England kept interest rates on hold last week but some experts predict rises later in 2026, which means mortgage deals could increase yet again.
The Bank tends to increase rates as inflation rises above its 2 per cent target.
As it is currently sat at 3.3 per cent, and set to climb further, an increase to the current bank rate of 3.75 per cent is expected to happen in the next couple of months.
The Consumer Prices Index (CPI) inflation measure is expected to rise because of the impact the conflict in the Middle East is having on oil prices, which will likely feed in to the prices of other goods and services.
But how much prices – and interest rates – could rise by is still a topic of much debate, alongside what the impact could be on mortgage rates?
Why might interest rates rise later this year?
Interest rates are used as a tool to keep inflation at or around the Bank’s 2 per cent target.
The base rate, sometimes called the bank rate, is the core interest rate in the UK, and is the rate of interest the Bank of England pays to commercial banks, building societies and financial institutions that hold money with it.
If the Bank increases interest rates, it broadly means that the cost of borrowing money – for example via mortgages or loans – is more expensive, and the rate of return people get for saving money is higher.
This can discourage spending and borrowing, with the aim being that this lower demand for goods keeps prices from rising dramatically.
Since the conflict in the Middle East started earlier this spring, inflation has already risen, and is expected to rise further. Part of this is down to the disruption in the Strait of Hormuz, which is a key shipping lane for oil.
At its latest meeting last Thursday, the Bank of England published three scenarios for the conflict, and in all three, inflation would rise from its current level.
Economic forecasters also expect higher inflation. Pantheon Macroeconomics currently forecasts inflation of 3.8 per cent in the third quarter of the year, while accounting firm RSM UK says it is “almost certain to go higher” later in 2027.
How much could interest rates rise by?
As a result of inflation going higher, some forecasters expect there to be multiple interest rate hikes this year, though this is by no means guaranteed as some others do not expect any hikes at all.
Financial traders’ bets suggest that they expect roughly two interest rate hikes this year, which would take rates to 4.25 per cent.
Below is a table of several major forecasters and where they expect interest rates to be by the end of 2026.
Explaining their reasoning for backing two hikes, Pantheon Macroeconomics said: “We see the Bank’s Monetary Policy Committee’s updated guidance as open to hikes, and now forecast two hikes in 2026, followed by three cuts starting in 2027, compared to our call for one hike and two cuts
previously.”
Deutsche Bank said: “Given elevated geopolitical uncertainty, risks of multiple rate hikes can no longer be discounted. But for now, we just about stick to our call for no change in bank rate over the coming quarters.”
What would it mean for mortgages?
How the Bank of England’s movements affect mortgage rates depends exactly on what product you are on.
If you are on a tracker mortgage, this will follow the Bank’s changes directly. For example, if you have a tracker at a rate of 3.96 per cent, and the Bank hikes rates by 0.25 percentage points, your mortgage goes to 4.21 per cent.
If you have a standard variable mortgage, the same broadly applies. Though your lender doesn’t technically have to follow the Bank’s movements, in practice they generally do.
Fixed-rate mortgages, the most popular type, operate very differently.
If you have a fixed-rate mortgage, the rate you locked in is not affected by the base rate at all, but if you’re getting a new fix, because yours has expired, it will be impacted.
Fixed rates tend to be priced on a combination of factors, including how keen lenders are to drum up business, and something known as swap rates. These swap rates tend to follow predictions for where the Bank of England base rate will go in the future and they are based on traders’ bets.
As a result, they’re currently a lot higher than the base rate – with the cheapest at around 4.45 per cent.
The average two-year fix is currently 5.77 per cent, according to Moneyfacts, whilst the average five-year is 5.68 per cent (although there are cheaper deals to be found depending on the size of your deposit or equity).
If the Bank of England base rate stays the same, it could show that predictions of rises were wrong, and swap rates – and therefore mortgage rates – may fall.
One or two hikes across the course of the year – in line with market predictions – could mean fixed rates stay broadly the same.
But if it starts to look like there will be three or more interest rate hikes this year, then mortgages could become even more expensive.
Lewis Shaw, a broker at Shaw Financial Services, said: “If we get the one to two hikes that are already priced in, you’d expect fixes to be fairly stable, with only small moves up or down as lenders tweak margins, funding costs and chase or avoid business.
“If we end up with fewer hikes than currently priced, or cuts come into view sooner, then all else being equal you’d expect swaps to drift down and fixed rates to follow, but probably slowly rather than in big sudden chunks unless there’s a real shift in the inflation or growth story.”
Should you fix your mortgage – or could a tracker?
Some mortgage borrowers are choosing to get tracker mortgages for now. These are generally cheaper than fixed mortgages at the moment – currently some are available for less than 4 per cent.
Most of these borrowers are hoping that fixed rates drop and they can then fix on to lower rates. Many trackers have no early repayment charge, and so you can move off them on to a fix without a penalty.
Nick Mendes, of John Charcol brokers, said: “I can see the attraction at the moment if they are coming in around 0.5 per cent below the best fixes. For some borrowers, especially those who want flexibility or think rates may ease sooner than currently priced, that can make a lot of sense.
“The lower starting rate helps with monthly cashflow, and many trackers come with lower early repayment charges or none.
“The trade-off is that you are taking on more uncertainty. If inflation stays sticky or the Bank has to keep rates higher for longer, that apparent saving can narrow quite quickly. I would not say trackers are the obvious answer across the board, but I do think they deserve more attention in this market than they have had for a while.
“For borrowers who value certainty, a fixed rate still does the job. It is probably more a question of appetite for risk and flexibility than trying to guess the exact base rate path from here.”
David Hollingworth, of L&C Mortgages, said there was a halfway house option.
“It’s also possible to mix and match to hedge your bets. For example you could put half on a fix and the other half on a tracker. If rates don’t rise then you have some benefit of the lower pay rate on the tracker deal but if rates do climb your exposure is limited.”
