How does inflation affect your mortgage?

As reported by the Office for National Statistics (ONS), UK inflation, measured by the Consumer Prices Index (CPI), rose to 3.5% in April 2025. up from 2.6% in March. While this is significantly lower than the peak of 11.1% in October 2022, it remains above the Bank of England’s target of 2%

Rises in inflation impact the economy, but also the general standard and cost of living. One of the most concerning consequences of the rise of inflation is the effect high inflation has on mortgage repayments.

What is inflation?

Inflation measures the rate at which the prices of goods and services increase over a year. In the UK, it is primarily tracked using two indexes, which compare based on figures from the previous year. The change in those prices is expressed as a percentage. The two indexes which are used in the UK are:

• Consumer Prices Index (CPI): The government’s official measure, excluding housing costs.
• Retail Prices Index (RPI): An older measure that includes housing costs such as mortgage interest payments and council tax.

In practice this could mean that if the CPI is at 2%, it indicates that, on average, prices are 2% higher than they were a year ago. Both CPI and RPI look at products like groceries and petrol as well as services such as eating out, utility bills and mobile phones, but the RPI also includes certain housing costs and mortgage repayment costs. The government now uses the CPI as its inflation index and it does not include house prices or mortgage repayments.

How does inflation affect my mortgage?

Inflation significantly influences monetary policy. The Bank of England monitors inflation closely and adjusts the base interest rate to maintain its target inflation rate of 2%. If inflation seems like it might rise above the target, the Bank of England may increase the base rate to cool spending and borrowing, discouraging businesses from increasing prices too much. Conversely, if inflation falls below the target, the Bank of England might reduce the base rate to make borrowing cheaper, enabling consumers and businesses to spend more, which can invigorate an economy.

Inflation has a critical effect on the price you pay for a mortgage. If interest rates go up in order to counter inflation, anyone looking to get a new mortgage will have to pay more interest than they would have if they had applied before the interest hike. Depending on your Mortgage type, you’ll be affected differently:

• Tracker Mortgages: These directly follow the Bank of England base rate. An increase in the base rate leads to higher monthly repayments (use our handy calculator to find the increase).
• Standard Variable Rate (SVR) Mortgages: Lenders usually adjust these rates in response to changes in the base rate.
• Fixed-Rate Mortgages: These remain unaffected during the fixed term but may be higher when securing a new deal if base rates have risen.

As of May 2025, the Bank of England base rate stands at 4.25%, following a series of cuts from a peak of 5.25% in August 2023. Despite these reductions, mortgage rates remain relatively high compared to the pre-2022 period.

Is there anything I can do?

The main defence against rising inflation is to get a fixed-rate mortgage. These work as insurance against interest rises by establishing a set level of interest for your repayments that won’t change for a set period of time, usually 2 or 5 years, but there are other terms available.

The gamble on these is that they tend to be more expensive than variable or tracker rate products, and if interest rates actually go down, you won’t be able to take advantage of the savings. Fixed-rate mortgages are usually calculated on expected interest rates calculated by the bank, so you will be relying on their expertise to give you the best deal.

The best way to prepare for inflation is to do your research and talk to a professional. Here at Coreco, we’ve guided clients through various economic climates and have seen and predicted inflation rising and falling for years. If you’re worried about what kind of mortgage they should get or want to know how inflation will affect their circumstances, why not get in touch?

Contact us today to discuss your options and secure a mortgage that offers peace of mind in uncertain times.

Give us a call on 020 7220 5110 or fill out the form below to arrange a no-obligation chat!

Your home may be repossessed if you do not keep up repayments on your mortgage.

There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.