6th October 2026
For the past couple of years, borrowers have been given a fairly reassuring message. Interest rates rose sharply to bring inflation under control, but once inflation began to fall the expectation was that rates would gradually come down again.
That has encouraged many people to believe that the worst is behind them.
But there is another question that anyone considering taking on new debt should perhaps ask before signing on the dotted line:
What happens if interest rates stop falling and start rising again?
It is not a prediction that rates are about to rise. It is simply a reminder that interest rates can move in both directions.
And anyone taking on a large financial commitment needs to be able to cope with more than the most favourable scenario.
Could you afford another 1 or 2 per cent?
Consider someone taking out a £200,000 repayment mortgage over 25 years.
At an interest rate of 4%, the monthly repayment would be roughly £1,056.
At 5%, it rises to about £1,169.
At 6%, it is approximately £1,289.
That means an increase from 4% to 6% would add around £230 a month, or almost £2,800 a year.
For some households that might be manageable.
For others it could mean cutting back on food, heating, holidays, cars, entertainment or savings.
And that is before considering what might happen to other household costs at the same time.
The important point is therefore not simply to ask whether you can afford the interest rate being offered today.
Could you still afford the borrowing if the rate became 1 or 2 percentage points higher?
The mortgage rate is only part of the calculation
There is a temptation when arranging a mortgage to concentrate on the monthly payment.
If the bank says you can afford £1,100 a month, it can be tempting to think that is the end of the calculation.
But households do not live in a spreadsheet.
Electricity and heating bills can rise. Council tax can increase. Insurance can go up. Food prices can increase. Cars need repaired. Washing machines and boilers eventually need replaced.
And if a household has children, there are likely to be additional costs as they grow older.
A mortgage that looks perfectly affordable when everything else is going well can become much less comfortable when several costs rise together.
That is why a little financial headroom can be worth far more than borrowing the maximum amount a lender is prepared to offer.
What about other forms of borrowing?
The same principle applies beyond mortgages.
A bank loan may look affordable because the monthly payment fits comfortably within the household budget.
But what happens if interest rates rise?
And what happens if the household's income does not rise at the same time?
Credit cards deserve particular caution.
Someone paying off the balance in full every month may not be particularly concerned about the interest rate.
But anyone carrying a balance from month to month can find that interest charges become a significant part of the repayment.
A purchase that seemed affordable when it was made can become considerably more expensive when the debt takes years rather than months to clear.
The question should therefore perhaps be:
Do I really need to borrow this money, or am I simply borrowing because I can?
The danger of becoming accustomed to cheap money
There is another psychological problem.
When interest rates remain relatively low for a long period, people can become accustomed to cheap borrowing.
A £20,000 loan may not seem particularly frightening when the monthly repayment looks manageable.
A £250,000 mortgage may appear affordable when the monthly payment fits comfortably into current household income.
But debt is a commitment to future payments.
And nobody knows precisely what their financial circumstances will look like five or ten years from now.
That is why the question should not simply be:
"Can I afford this today?"
It should also be:
"Would I still be comfortable with this debt if circumstances became less favourable?"
Fixed rates do not remove the risk
A fixed-rate mortgage provides valuable protection because the interest rate cannot suddenly increase during the fixed period.
But the risk has not disappeared.
It has simply been delayed.
When the fixed-rate period ends, the borrower has to refinance at whatever rates are available at that time.
Someone who has become accustomed to a low monthly payment can therefore face a nasty surprise when the mortgage is renewed.
This is particularly important for people who have taken on large mortgages because they assumed that interest rates would continue falling.
If rates are higher when the fixed period ends, the household may suddenly have considerably less disposable income.
The question borrowers should ask themselves
Perhaps lenders should make the question even simpler.
Before taking on significant new borrowing, ask yourself:
What would happen if my interest rate increased by 1 percentage point?
Then ask:
What if it increased by 2 percentage points?
Could you still pay the mortgage?
Could you still pay your other debts?
Could you continue heating your home properly?
Could you cope with an unexpected £1,000 or £2,000 bill?
Could you continue saving something each month?
And perhaps most importantly:
Would you still have a reasonably comfortable life, or would every penny of your income already be committed?
If the answer is that a relatively small increase in interest rates would cause serious financial problems, perhaps the amount being borrowed needs another look.
Nobody knows where interest rates will be in five years
This is not an argument for predicting the next interest-rate move.
Economists, central banks, governments and financial markets can all make forecasts, but nobody knows exactly what inflation, energy prices, wages, wars, government borrowing or the wider economy will look like several years from now.
Interest rates could continue falling.
They could remain around current levels.
Or circumstances could eventually force them higher again.
The sensible approach for an individual borrower is therefore not necessarily to predict the future.
It is to prepare for the possibility that the future will not turn out exactly as expected.
Borrowing less can be a form of insurance
There is sometimes a tendency to think of financial caution as missing out.
If the bank is prepared to lend £300,000, why only borrow £250,000?
If a car loan is affordable, why not buy the more expensive model?
If a credit card provides another £5,000 of available credit, why not use it?
But borrowing less provides something that is difficult to put a price on:
financial breathing space.
Having a lower mortgage or smaller loan means that future interest-rate increases have less impact.
It also means that if another household expense suddenly rises, there is a better chance of absorbing it without reaching for yet more credit.
The lesson from the last few years
The experience of recent years should perhaps have taught us something.
For a long time, very low interest rates seemed almost normal.
Then inflation arrived and rates rose dramatically.
Many households discovered that debts which had seemed perfectly manageable could become much more expensive.
The danger now is that we make the opposite mistake.
As rates begin to fall, we could once again assume that cheap borrowing is returning permanently.
It may not.
Before borrowing another pound
There is nothing wrong with borrowing when it is sensible and affordable.
A mortgage can allow someone to buy a home that would otherwise be impossible to purchase.
A loan can provide essential transport or allow a business to invest.
But before taking on another financial commitment, it might be worth asking five simple questions:
Do I really need to borrow this money?
Could I afford it if interest rates rose by 1 percentage point?
Could you afford another 1, 2, 3 or even 4 per cent?
Consider someone taking out a £200,000 repayment mortgage over 25 years.
At an interest rate of 4%, the monthly repayment would be roughly £1,056.
At 5%, it rises to about £1,169.
At 6%, it is approximately £1,289.
At 7%, it reaches about £1,414.
And at 8%, it is around £1,543 a month.
That means someone taking out the mortgage at 4% would face an increase of almost £490 a month if the rate eventually reached 8%.
That is almost £5,850 a year in additional mortgage payments.
Nobody is suggesting that an 8% mortgage rate is the most likely outcome. The point is rather to ask whether borrowers are leaving themselves enough room to cope if interest rates move in the wrong direction.
A borrower who can only just afford the mortgage at today's rate could find themselves in serious difficulty if rates rise substantially.
The question should therefore not simply be:
"Can I afford the mortgage at the rate I am being offered?"
It should be:
"Could I still afford it if the rate eventually reached 7% or even 8%?"
That may sound unnecessarily pessimistic.
But when taking on a mortgage lasting 20, 25 or 30 years, perhaps it is better to test the finances against an uncomfortable possibility rather than assume that today's interest rate will remain the norm.
Could I cope if they rose by 2 percentage points?
Would I still have money left for unexpected bills?
Am I leaving myself enough financial breathing space?
Interest rates may continue falling.
But perhaps the safest assumption for anyone taking on debt is that they might not.
Because when you borrow money, you are not just committing yourself to today's interest rate.
You are committing part of your future income.
And the future is the one thing none of us can guarantee.