Why your mortgage bill might rise as rates fall

This article was original shared on the Resolution Foundation’s Substack.

I’ve been writing about rising mortgage rates for some time now. During that time, mortgage interest has become an increasingly big deal. Last year, around 8 million British households stumped up a total of £65 billion in mortgage interest – almost double the £35 billion interest bill in 2019.1

But it’s not just the sheer scale of all this that is interesting here. More mind bending has been the counter-intuitive ways mortgage rates have moved as the Bank of England initially increased, and then cut, its policy rates. The Bank is now nearly 18 months into its rate-cutting cycle, but, to many, it doesn’t feel like it.

Taking out a mortgage today is cheaper than it was a few years ago, and savers are getting less interest too. But if we look at the stock of all outstanding mortgages – rather than just new ones – we’re set to see aggregate interest payments rise this year, and with it a rising mortgage interest bill for the nation, even as the Bank (presumably) continues to cut rates.

Huh? How does that happen? It’s doubly confusing when you keep in mind that the average rate on outstanding mortgages in Britain had flattened off by the end of 2025.

How can payments be rising as rates fall? And when will households’ aggregate interest bill finally start to come down?

Let me explain how this can happen, with some simple arithmetic on stocks and flows.

A key influence on the average interest rate across the stock of mortgages is the average rate on the flow of new mortgages coming into the stock each month. These can be first time buyers, home movers, or simply people remortgaging when their existing deal expires. As you’d expect given cuts from the Bank of England, the average rate on these new mortgages fell in 2025. But this started to level off by the end of the year (it fell by less than 0.1 percentage points between July and November). As of November, it remains above the average rate on the stock. Early signs in 2026 are for further modest falls in new mortgage rates, but it may be some time before the average rate on new mortgage rates is below the average rate on the stock. So, for a while at least, new mortgages will be pulling up the overall average.

Looking at new mortgages entering the stock doesn’t tell us everything though. We also need to consider at the average rate on the off-flow of mortgages leaving the stock – mostly from mortgage holders moving house or remortgaging at the end of their deal. The lower the rates on these mortgages, the more removing them from the stock pushes up the overall average rate.2

The structure of the mortgage market makes it blessedly amenable to this sort of analysis. Most new mortgages are either two-year or five-year fixes. Together, they’ve accounted for nearly £9 in every £10 lent so far this decade. So, to get a decent handle on what’s happening to rates falling out of the mortgage stock today, we can simply look at what was happening to two-year fixes two years ago, and five-year fixes five years ago.

In the early stages of Britain’s rate-rising cycle, the bulk of the increase in the average interest rate across the stock of mortgages came from the expiry of cheap two-year and five-year fixes secured before the inflation shock began in early 2022. We are now in a different, messier phase. People coming off two-year fixes are rolling off deals that are more expensive than prevailing rates today – which pulls down the average rate on the stock. Meanwhile those rolling off five-year fixes continue to push up average rates as their super-cheap deals expire. What matters is the balance between these two.

Conveniently, in both cases lower rates in the past = more upward pressure/less downward pressure on average rates today. And that is indeed what we’ll see in 2026. The second half of 2023 was a high-water mark for UK mortgage rates, with two-year fixes taken out then (and expiring in the second half of 2025) being secured at historically high rates. When these mortgages fell out of the stock, they pulled down the overall average by a lot. In comparison, the two-year fixes expiring this year were secured at lower rates, and will exert a weaker downward pressure on the overall average. This dovetails with a similar story for five-year fixes – those expiring in the second half of 2026 were secured at historically low rates in late-2021, so will push up the overall average by more than ever when they expire.

So, barring any major shocks to interest rates or changes to the mortgage market in 2026,3 Britain’s average mortgage bill is set to keep rising in 2026.

But what will that mean? I have three takeaways.

• First, all this underscores how weird this interest rate cycle has been for mortgagors. It’s likely that the Bank will have got through an entire rate-rising and rate-cutting cycle before Britain’s mortgage bill reaches its new higher-rates equilibrium. Things weren’t always like this. In the past, the transmission from Bank Rate to mortgage rates was much quicker and aggregate mortgage bills followed Bank Rate more closely. Today’s world – where average mortgage bills are still rising despite the Bank cutting rates to boost the economy – is a trickier one for rate-setters to navigate.
• Second, this looks set to be a bad year overall for British households’ aggregate net interest position. A decent chunk of total household income comes from interest on savings, worth £52 billion or 3 per cent of disposable income in the most recent four quarters of data.4 This is more than offset by £92 billion of interest costs, most of which is mortgage interest, resulting in £40 billion of ‘net’ interest costs. This net figure has improved by £16 billion in real terms since 2021, more than accounting for the entire growth in real disposable income per head over the period. But this is set to reverse in 2026. Unlike with mortgages, transmission from Bank Rate to savings interest is simple: when the Bank cuts, savings rates go down. So in 2026, we could well see a double squeeze of rising mortgage costs and falling savings income.
• Finally, spare a thought for the ~750,000 households coming off five-year fixes this year, who are finally facing the music of higher mortgage rates. A typical first-time buyer who borrowed £220,000 over 30 years in 2021 will see their total monthly mortgage bill rise by £2005– equivalent to a 9 per cent pay cut for a typical full-time employee. Understandably, these households will attract limited sympathy from those who have already experienced a rate rise. But we shouldn’t forget that, for now at least, these budget-busting shocks are still ongoing.

2026 is set to be a turning point for the British economy in many ways. But, although the Bank of England’s latest rate-cutting cycle is well under way, the turning point for Britain’s aggregate mortgage bill is still a way off.

The flattening off we’ve already seen in late 2025 is set to give way to rising average interest rates in 2026 – with a messy combination of rate rises and falls for different households going on under the hood. It’s a stark reminder that some of the lags in monetary policy are longer and more variable than ever. In the mid-2000s three quarters of outstanding mortgage debt was on a variable rate. That has now dropped to one tenth. This is monetary policy on hard mode.

Follow Simon Pittaway on Bluesky for the latest udpates on his research.