The difference between interest and inflation is quite simple. Inflation is the rate at which the prices of goods and services rise. Therefore, inflation will rise and fall based on supply and demand.

Interest is a percentage charged on the total amount of money borrowed. Interest also applies to savings accounts, as you can earn interest on the money you save.

Interest rates rise with inflation because lenders follow the Bank of England base rate and adjust their interest rates accordingly. Whether the base rate increases or decreases largely depends on the economy. So, when the base rate goes up, interest rates will likely follow.

Put simply, the base rate will usually rise when inflation is increasing too quickly. It’s designed to help stabilise the economy - i.e. if it costs more to borrow money, people would be encouraged to borrow less and save more. This in turn reduces demand for certain goods and services, slowing inflation down as a result.

Interest rates change over time, as they’re responsive to both borrower demand and the supply of funds available. For this reason, interest rates can go either way. 

It’s difficult to pinpoint an exact timescale for changes in interest rates, as they’re largely dependent on the Bank of England base rate. 

This is a complex one. Technically, interest rates can affect the supply of 90% and 95% loan-to-value (LTV) mortgages. By this, we mean the same risk factors that influence the base rate can affect the types of mortgages available. 

For example, the uncertainty that came with the coronavirus pandemic meant that 95% LTV mortgages became a much larger risk for lenders. For this reason, 95% LTV mortgages have become somewhat rare. However, as the light at the end of the pandemic tunnel started to emerge, the government introduced the Mortgage Guarantee Scheme towards the end of 2021. 

What’s the Mortgage Guarantee Scheme?

The Mortgage Guarantee Scheme is a government initiative designed to help bring 95% LTV mortgages back into the market. The scheme works by offering lenders the option to purchase a guarantee on mortgages with a 5% deposit. This means they would be compensated for a portion of any net loss in the event of a repossession. As a result, the risk associated with 95% LTV mortgages is reduced. The Mortgage Guarantee Scheme is set to run until mid-2025.

If you’re investing your money in savings, you’ll naturally question when interest rates on savings go up. Changes in the base rate can result in interest rates rising for savers. That said, changes may not be to the same extent as for those who’ve borrowed money. 

When interest rates rise, the immediate impact is felt by those with mortgages or loans. By this we mean their monthly repayments will increase if they’re on a variable rate. It’s important to note, the rise in interest for savings is impacted by both base rate changes and product availability from savings account providers.