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How does inflation affect your mortgage?

This guide was last updated 31 January 2024

As has recently been reported, in April 2022 inflation hit a near thirty year high of 9% and could well rise even higher during 2022.

The rise in inflation will have an impact not just on the economy, but on 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 is basically the rate at which the prices of goods and services have increased over the previous twelve months. It’s measured in a number of ways with the Consumer Prices Index (CPI) and the Retail Prices Index (RPI).  Both indexes measure the prices of general consumer goods and services comparing them to a year earlier. The change in those prices is expressed as a percentage – for instance, if the CPI is at 2%, then prices for the ‘basket’ of goods and services are, on average, 2% higher than they were the previous year. 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 has a significant impact on government and business decisions. The Bank of England keep a very close eye on inflation and use it establish interest rates. If they expect inflation to rise above 2% in the near future, then they may increase interest rates in an attempt to subdue it and discourage businesses from increasing prices any more than they have to. Or, if they expect inflation to drop much below 2%, they might reduce interest rates to make borrowing cheaper, enabling consumers and businesses to spend more, which can invigorate an economy. For this reason, 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. Alternatively, if you are currently on a tracker mortgage, then you can expect your monthly payments (use our handy calculator to find the increase) to go up the month after the Bank Of England increases the base rate.

Currently (June 2022) the Bank Of England is in the middle of a cost of living crisis and are increasing the base rate not so much to combat inflation now but to stop it from staying higher any longer than necessary. As the base rate is expected to increase further over the remainder of 2022, and possibly into 2023, we are seeing lender’s mortgage rates increase broadly in line with expectations.

Is there anything I can do?

The main defence against inflation rises 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/or talk to a professional. Here at Coreco we have seen – and predicted – inflation rising and falling, so we have the expertise to guide anyone worried about what kind of mortgage they should get, or wanting to know how inflation will affect their circumstances. Why not get in touch? We’d be very happy to hear from you.

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.

    Andrew Montlake

    Written by Andrew Montlake

    Andrew Montlake, better known as Monty, began his journey with an Hons degree in Economics & Politics before starting in the mortgage industry in February 1994. As a main founder of Coreco in 2009, he successfully grew the brand, marketing, and communications, and was made MD in 2019 focussing on the overall vision, strategy, and culture of the company. As Coreco’s media spokesperson, Andrew can often be seen or heard on TV and radio as well as regularly commenting in the national, local, and trade press. He is the author of this acclaimed Mortgage Blog and is well-known for his social media, podcasts, and public speaking. Andrew is now proud to serve as Chairman of the Association of Mortgage Intermediaries, (AMI) as a cheerleader for the Mortgage Industry as a whole and continues to work at the coal face, writing mortgage business and advising clients.

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