Mortgage rate rises could cost homeowners £268,000 in future retirement savings

Despite last week’s Bank of England decision to hold interest rates at 3.75%, those nearing the end of cheaper fixed-rate deals are still facing a sharp jump in monthly outgoings – with potential knock-on effects for long-term retirement savings.

New analysis from Standard Life highlights the trade-off between managing higher costs today and protecting future financial security, showing how money absorbed by higher mortgage repayments could make a significant difference if directed into a pension instead.

With average five-year fixed mortgage rates rising from 4.91% at the start of the year to 5.63% as of June, someone remortgaging onto a new £500,000 repayment mortgage over 25 years today would pay around £213 more each month than they would have done at the start of the year.

The impact could be significantly greater for borrowers coming to the end of older fixed rate deals secured when interest rates were much lower. Someone moving from a mortgage rate of 2.50%, secured in 2021, to 5.63% on a £500,000 repayment mortgage over 25 years could see repayments rise by around £866 a month.

The potential retirement trade-off 

While keeping up with mortgage repayments will naturally be the priority, higher monthly housing costs can reduce the amount available for other long-term savings, including pensions.

Standard Life analysis finds that someone who began working at age 22 with a salary of £25,000 and paid the minimum monthly auto-enrolment contributions throughout their career could build a total retirement fund of £210,000 by age 68.

If that person was able to contribute an additional £213 a month into their pension between the age of 34 (average age of a first-time buyer) for 25 years (average mortgage repayment period) their projected fund could rise to £276,000 - £66,000 more in today’s prices.

For someone able to contribute an additional £866 a month. the equivalent of the increased payments when moving from a 2.5% to a 5.63% mortgage rate, the pension benefit is greater, with the final retirement pot reaching £478,000 - £268,000 more than with minimum contributions alone.

Mike Ambery, retirement savings director at Standard Life, said: “The Bank of England’s decision to hold rates may provide some reassurance for borrowers, but with rates still expected to stay higher for longer, many homeowners refinancing this year are still facing a sharp jump in monthly repayments compared to the deals they’ve become used to.

“For those coming off lower fixed rate mortgages taken out before the recent rise in interest rates, the increase in costs can be significant. That’s putting real pressure on household budgets at a time when many people are already contending with higher day-to-day expenses, and may lead them to reassess their wider finances.

“For many people, buying a home is a key part of their long-term financial security. But as mortgage costs rise, households may have less flexibility to save elsewhere, including into their pension.

“If someone needs to adjust their finances, reducing pension contributions may feel like a quick way to free up income. However, stopping altogether can make it harder to stay on track for retirement. Where possible, maintaining some level of saving can help protect your long-term retirement savings.”