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Inflation and mortgage rates

Inflation has risen dramatically in the UK in recent months, with the rate currently sitting at 11.1% – a full percentage point higher than it was at the start of October.*

With inflation being so closely tied to interest rates, you may be worried as to how your current mortgage or any new mortgage deals may be affected by this.

In this blog, we will discuss the link between inflation and mortgages, as well as the potential increase in house prices and what this will mean for buyers.

What does a rise in inflation mean for mortgages?

Inflation simply refers to the rate at which prices of goods and services increase, with the percentage being higher the faster this happens. This will be based on supply and demand for products, with a higher demand and less supply equalling higher prices.

This has contributed to a significant rise in the average cost of living in the UK.

Inflation is directly linked with the interest rates that lenders will charge for credit cards, finance agreements and loans such as mortgages.

This is because increasing interest rates can cause the demand for products to slow down, as people will be less likely to borrow or spend.

This allows supply chains to catch up and means companies cannot put prices up so quickly. The Bank of England use this as a method of keeping the UK economy stable.

Do mortgage rates rise with inflation?

As you will be charged interest on your mortgage repayments, the rise in inflation and linked rise in interest rates will affect any new or current UK mortgage.

If you are on a tracker rate mortgage, it will be a good idea to watch the Bank of England for any announcements of interest rate rises. Their base rate currently sits at 3% but could be subject to increase to try and tackle inflation.

Any other variable rate mortgage could also be at risk of price increases, but this will depend on individual lenders. Lenders can change their rates at their own discretion but may choose to increase rates if the Bank of England does.

How does inflation affect mortgage rates?

Mortgages will be directly affected by inflation going up. Depending on the type of mortgage you have you will either repay the capital plus interest or repay only the interest element of your loan in your monthly payments.

Either way the amount you have borrowed will be subject to interest charged by the lender over time.

As inflation rises, interest rates will too as the Bank of England tries to battle rising costs and stabilise the economy. The bank rate will rise and many lenders will likely follow suit and raise their rates, incrreasing the overall cost of borrowing.

This will equal any mortgage holders with a variable rate paying more for their repayments for the foreseeable future.

Does inflation affect fixed-rate mortgages?

If you are on a fixed-rate mortgage, you should be safe from price increases for now. This is because you will have agreed a set interest rate with your lender that applies for a set time (usually 2 or 5 years).

If you are coming towards the end of your fixed-rate period, it is important to remember that you will be automatically switched to your lender’s standard variable rate when this happens.

In some circumstances this can be beneficial and lead to savings. However, with inflation and interest rates currently on the rise, it may be worth considering remortgaging to a new fixed rate deal with preferable rates.

Speak to one of our mortgage experts, if you need advice about which lenders are currently offering the best fixed rate deals and how to remortgage your property.

Should you pay off mortgage during inflation?

It can be possible to repay your mortgage early in a variety of circumstances. This will most commonly happen when a homeowner comes into a significant amount of money unexpectedly, either from investments or inheritance.

With inflation so high, you may decide now is the time to repay your mortgage in full if you can. That way you can avoid increasing interest rates moving forwards and possibly will end up repaying less overall because of this.

There are pros and cons to doing this as your mortgage could be subject to fees associated with leaving the loan agreement early.

It is possible though you may have a mortgage with no early repayment charges, so it is worth checking this with your lender.

Is inflation good for mortgage holders?

Generally, it will be lenders that benefit most from inflation as they will increase rates in response. This will lead to them making more overall profit from your mortgage loan.

However, with the UK in an unstable financial state, property could be seen as a more solid long term financial investment. This is compared to other investments, ISAs and savings accounts.

This is especially true if you have renovated or improved your property, increasing its value since it was purchased. If you are on a fixed-rate deal, the cost of your repayments will stay the same even as your house value increases.

You will also be able to avoid rises in rent costs that can occur due to inflation, as you own your own property. This makes buying a more attractive option overall if it is possible for you to do so.

Do house prices rise with inflation?

There will be many questioning if inflation rises what happens to house prices – the main question being ‘will inflation cause house prices to rise?’.

This question makes sense as inflation is caused by the rise of many essential products and services. Housing is yet another essential resource that can be affected by rising costs and so the housing market will likely be affected.

It is possible that inflation will lead to higher house prices moving forward. This can be good news if you are looking to sell, as you may be able to get more for your property than you would have previously.

If you are thinking of buying, you may have to budget slightly more than planned to get the house you want.

We would advise that if you have your eye on a new property, it is worth buying sooner rather than later to avoid paying a higher price. If you take out a fixed-rate mortgage deal, you may also be able to avoid interest rate increases further down the line.

*according to the BBC

Useful resources

Bank of England – What are interest rates?

Office for National Statistics – Inflation and price indices

Office for National Statistics – Consumer price inflation, UK: October 2022

Statista – United Kingdom: Inflation rate from 1987 to 2027

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