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How does inflation affect your mortgage?

22.02.17

The BBC recently reported that UK inflation is the highest since mid-2014.

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 it has on mortgage repayments.

What is inflation?

Inflation is basically the rate at which the prices of goods and services have increased. It’s measured in a number of ways, but most commonly with the Consumer Prices Index (CPI) and the Retail Prices Index (RPI).  They measure the prices of general consumer goods and compare them to a year earlier. These are expressed as percentages – for instance, if the CPI is at 2%, then prices for goods are 2% higher than the previous year. Both CPI and RPI look at products like groceries and alcohol, but RPIs also include housing costs and mortgage repayment costs.

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. Or, if they expect inflation to drop below 2%, they might reduce interest rates. 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 to go up.

In 1991, inflation reached double figures and it caused the cost of mortgages to erupt. Property repossession increased to a record high as many people couldn’t keep up with their mortgage repayments. Those that could were now living in a property where the price they paid for the house represented significantly less value than when compared to when they originally paid for it.

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. The gamble on these is that they tend to be more expensive, 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.

Since voting to leave the EU, our currency has weakened, and many economists believe that this will cause inflation to rise further. 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.