According to the Office for National Statistics, inflation hit a near 40 year high of 9% during April and could yet rise further during the remainder of the year. Driven by a further increase in the energy price cap coming in in October, experts are predicting this figure could rise to 10% putting a further strain on our finances and the general cost of living. One concerning aspect of this is how inflation can affect mortgage repayments.
What is inflation?
In essence, inflation is the rate at which the price of goods and services has increased over the last 12 months. It can be measured using the Retail Price Index (RPI) or the Consumer Price Index (CPI). Both measures use a ‘basket of goods’ and express the price of change in percentage form compared to the previous year. Currently, the government uses the CPI index and has an inflationary target of 2%
How can inflation affect my mortgage?
The Bank of England can use the rate of inflation as a guide to determine how they manipulate interest rates. If inflation is on the rise, they can increase interest rates in the hope that it will suppress price rises. Conversely, if inflation is low then the Bank of England may cut rates to encourage consumer spending.
With inflation on the rise, the Bank of England has had to raise interest rates several times this year from 0.25% in February to 1.25% today. This is currently a 13 year high.
Anyone looking to get a new mortgage will face a higher rate of interest, and those currently on a tracker mortgage will see their payments increase at the beginning of the month after an increase in the base rate. In recent months mortgage rates have been steadily increasing as a result, typically at short notice, with the average 2 year fixed now above 3%.
Those on a fixed rate are currently shielded from such rate rises, however once their deal comes to an end, it is likely they will be faced with higher rates and subsequently higher monthly payments.
What can I do about my mortgage and inflation?
With inflation on such a rise it is a good idea to complete a budget planner and see what expenses you can reduce. Considering your mortgage is likely to be your biggest outgoing it is worth reviewing this as well. If you are on a tracker deal you could consider moving to a fixed rate as this is the main defence against rising inflation. A fixed rate will guarantee your monthly payment during the fixed term regardless of how rates change. The risk, however, is that if rates do in fact go down, you will not be able to benefit from such a saving.
It is expected rates will continue to rise during 2022 and on into 2023, potentially hitting 3% according to some experts. For those whose rate is due to expire it is worth speaking to a whole of market mortgage broker as you would be able to lock in a new offer up to 6 months of the current rate expiring.
Speak to one of our expert mortgage brokers. They can provide advice on your current circumstances at a time that is convenient to you.
Your home may be repossessed if you do not keep up with your mortgage payments.
This article was written by Andrew Connor