With inflation on the rise again, homeowners and prospective buyers are feeling the pinch. The latest figures from the Office for National Statistics (ONS) show that inflation reached 2.3% in the year to October, surpassing the Bank of England’s 2% target. While this increase might seem like just another number, it has a real impact on household finances—including mortgage costs. Rising inflation affects how much money you need for everyday expenses and can make the dream of homeownership seem more challenging. Whether you are looking to buy your first home or refinance an existing mortgage, understanding inflation’s impact is key to making informed financial decisions.
What Does Inflation Mean for Mortgage Rates?
Inflation is the measure of how much the cost of everyday goods and services has increased over the last year. When inflation rises, it generally signals increased costs for essentials such as food, clothing, and, crucially, energy bills. This October, household energy bills rose by an average of £149 due to the energy price cap increasing. Such changes directly affect everyone’s monthly outgoings, leaving less disposable income to put towards savings or mortgage payments.
But inflation also plays a key role in how interest rates are set. As inflation has risen, the Bank of England may approach rate changes more cautiously. The base rate—which lenders use as a benchmark to set mortgage interest rates—was recently cut from 5% to 4.75%. While a lower base rate might sound like good news, the latest rise in inflation has reduced the likelihood of further cuts, making it harder for homebuyers to benefit from lower borrowing costs. When inflation is high, central banks often avoid lowering interest rates further because doing so could lead to runaway price increases. This means that, while the Bank of England’s recent rate cut may have provided temporary relief, future cuts could be off the table.
Mortgage rates are heavily influenced by inflation trends and the base rate set by the Bank of England. Higher inflation can cause lenders to increase mortgage rates as they look to protect their profit margins. The connection between inflation and interest rates means that when inflation rises unexpectedly, lenders often adjust their rates to reflect the increased cost of borrowing money. For homeowners with variable-rate mortgages, this can mean higher monthly payments almost immediately.
Will Mortgage Rates Go Up?
It’s understandable that many potential buyers and current homeowners are worried. It is possible that the recent inflation rise could discourage further base rate cuts, leading lenders to adjust mortgage rates upwards instead. This could spell more difficulty for anyone looking to secure an affordable fixed-rate mortgage. The knock-on effect of inflation means that the cost of borrowing is likely to stay higher for longer, impacting anyone considering buying a home or remortgaging.
While some lenders may maintain their current rates, the uncertainty around inflation could result in a creeping increase in the cost of new fixed-rate deals. Lenders are cautious when inflation rises because it affects the economy’s stability. The unpredictability of inflation creates hesitation among lenders, who may decide to raise interest rates to mitigate potential risks. If you’re planning on buying or remortgaging, it’s a good idea to keep a close eye on market changes and speak to a broker for personalised advice—especially if rates continue to shift.
Additionally, the rising cost of living is likely to make lenders more conservative in their lending criteria. With household expenses going up, lenders may view potential borrowers as riskier, meaning that securing a mortgage may require higher deposits or stronger credit scores. This makes it even more important for buyers to be prepared, plan their budgets carefully, and understand what lenders are looking for during this period of economic change.
What Should You Do Now?
The current economic environment has led to mixed effects: while mortgage rates may stay higher, savings rates, particularly for long-term accounts, have also remained steady or even increased. For savers, this is an opportunity to secure better returns despite the general economic pressure. The key is to stay proactive and well-informed, ensuring you make the right moves when it comes to both saving and borrowing.
If you’re a first-time buyer, homeowner, or someone considering a remortgage, there are a few steps you can take:
- Review Your Options: With mortgage rates potentially on the rise, it’s wise to explore fixed-rate deals if your existing mortgage deal is running out within the next six months or has already ended. Locking in a rate could protect you from increases down the line. Fixed-rate mortgages provide certainty in an otherwise uncertain environment by locking in a stable interest rate for a set term, helping you manage your monthly outgoings more effectively.
- Speak to an Expert: Brokers can help navigate the current landscape, helping you understand which options might work best for your situation. A broker can provide a clear understanding of the market and explain how different mortgage products might be affected by changes in inflation. They can also help you find exclusive deals that may not be available to the general public, giving you an edge in securing the best possible rate.
- Consider Your Budget: Rising household costs can affect your ability to save and make mortgage payments. Make sure your budget factors in these potential increases. Creating a detailed budget that includes possible rate increases and higher living costs will help you determine how much you can realistically afford. It’s also wise to build a financial cushion for unexpected changes in your expenses or income.
- Monitor the Market: Economic indicators such as inflation, energy prices, and interest rate decisions can all impact your mortgage. Staying informed will help you anticipate changes and make decisions accordingly. Make it a habit to regularly check financial news or speak to your mortgage advisor for updates.
A Changing Landscape
Inflation is just one of the many economic factors affecting the housing market today. While it’s not all bad news—savers may see some advantages—it’s essential for homeowners and buyers to remain informed and prepared. Rising inflation doesn’t just affect the price of your weekly shop; it has direct implications for your mortgage and overall financial wellbeing. For instance, high inflation can eat into your disposable income, making it harder to save for a deposit or cover monthly payments. Conversely, if inflation falls, it could lead to lower interest rates, which might make borrowing more affordable in the future.
The ripple effect of inflation impacts many aspects of financial planning, from mortgage affordability to the value of savings. It’s important to take a holistic approach to your financial situation, considering not just your mortgage but also your savings, income stability, and future plans. In times of economic uncertainty, having a comprehensive strategy can help you stay on top of your finances and make the best choices for you and your family.
If you’re unsure about how inflation or changing rates might impact you, speaking to a mortgage advisor can be a great first step in understanding your options and making informed decisions. An advisor can help assess your specific needs, whether that’s locking in a competitive rate, exploring flexible mortgage options, or simply planning for the future. The key takeaway is to be proactive, stay informed, and seek professional advice when needed.
The current economic climate may seem challenging, but with the right guidance, you can navigate these changes successfully. Inflation and fluctuating interest rates are part of the broader financial landscape, but they don’t have to derail your homeownership goals. By understanding what drives these changes and preparing accordingly, you can make confident decisions about your mortgage and financial future.
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Disclaimer:
This article is for general guidance purposes only and does not constitute legal, financial, or professional advice. Mortgage products and their terms can vary, and it is important to seek advice from a qualified, regulated professional who can assess your individual circumstances. Please ensure you consider your unique needs before making any financial decisions.
While every effort is made to ensure that the information provided on this blog is accurate and up-to-date, we do not guarantee its completeness or accuracy. The mortgage market can change rapidly, and the information on this blog may become outdated. We recommend verifying any information before acting on it and seeking tailored advice.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
