This guide was last updated 15 March 2022
Currently, almost every other day we are reminded about inflation, that it is rising, it is out of control; it is squeezing household budgets accompanied by many worrying headlines to grab our attention.
It is no wonder many of us are concerned.
Many borrowers will think of their biggest monthly commitment–their mortgage–and what will happen to that. So, let’s look at what is causing this inflation increase, what the Bank Of England is doing, how that affects mortgage payments, and what you can do about it?
Inflation is the change in the cost of a selection of typical goods and services that we all use regularly. The government departments look at the total cost of those goods and services twelve months ago and compare that to the cost today. If that total cost has risen, we have inflation, whilst if it drops, we have deflation.
Currently, there is an ‘energy crisis’ where the cost of oil, gas, and electricity has all risen. Since we use energy in almost everything we do and buy, the cost of many of the goods and services have also risen all at once–their prices have inflated. Although a low level of inflation could be seen as a good thing in many respects, it is a bad thing if prices rise too quickly.
In the current case, it is the cost of production that has risen, and this is called ‘cost push’ inflation, rather than when wages rise quickly giving people lots of money to spend and we have ‘demand pull’ inflation.
The Bank of England has many roles to perform and although they perform those roles independently, they answer to the government. There is a maximum level of inflation target that is set at 2% a kind of ceiling above which the Bank Of England has to justify how inflation has achieved such a level and what they plan on doing about it.
Currently, inflation is over 5% and the pressure on the Bank of England to act is considerable. There are a few options open for action but the biggest, and possibly the bluntest tool to use is interest rates.
Interest rates are what savings and mortgages are based on, with the individual lenders setting the rates of interest for both savers and borrowers accounting for over 80% of the adult population.
The Bank of England, with whom many financial institutions bank themselves and have dealings, sets a rate of interest that effectively underpins all other rates–the Bank Base Rate. This is a rate that no individuals can access themselves, and lenders use this as a starting point for many of their mortgage products.
If the Bank of England increases the Base Rate, then the lenders increase their lending rates, and the cost of mortgages increases. This means people have less money to spend. With people spending less money businesses cannot carry on increasing prices, things become more affordable, and inflation reduces. That is the plan!
In December 2021 and in February 2022, the Bank of England increased the Base rate for this very reason. Currently, the base rate is at 0.5%, an increase from the pandemic’s reductions to the same level it was for much of the last decade. In March and May 2022, the Monetary Policy Committee within the Bank of England will meet again, and they will consider increasing the Base rate further each time.
It is thought they will do just that, but predictions of exactly when and by how much vary considerably. What is not in question is whether it will increase the Base rate during 2022 – the consensus is it will be.
There is some good news for many borrowers here. Borrowers on fixed rates will see no change at all in their payments until their fixed rate deal expires–for some the ending of their fixed rate is years away but for others that are coming up in the next year.
Borrowers on variable or tracker rates will see their payments increase the month after any change in the Base Rate as their lenders increase those products. Tracker products are directly linked to the base rate, but variable rate products are not, however lenders increase or decrease them in line with the Base rate changes, anyway.
Essentially, if the Base Rate goes up, then mortgage payments go up–either the following month or when a fixed rate ends.
All anyone can do is plan and decide what is best for them and this is where brokers can add some real value in these expensive times. They can help you find out what your options are.
Essentially, you can switch lenders or products but find out if you would have to pay any ‘early redemption penalty charges.’ If you do, wait until the penalty period ends. But that might not mean there is nothing you can do.
Some lenders allow existing borrowers to switch to a new product up to three months before the end of their existing deal but for many, you can only apply for a new product within the last thirty days to start the beginning of the month after your current deal ends. For many, that is too far in the future, and they would like to secure one of the low products still available before they rise too far.
If your current deal expires in the next seven or maybe eight months, then you should talk to a professional broker. At Coreco we know which lenders will allow you to submit an application now that will still be valid for three to six months. With some careful planning, you could secure a rate long before your current rate ends and before your current lender will allow you to select a new product.
During that waiting time rates could have increased considerably. Brokers will also be able to talk you through the advantages and disadvantages of short-term products and longer-term products to best suit your future needs and budgets.
But what if your current deal doesn’t finish for over six to eight months? What if it is a year away, and you are worried?
Again, talking to a professional broker will help. At Coreco, we understand some borrowers are happy to pay an early repayment charge if the new mortgage product makes it worthwhile doing so–and that is not just based on the actual cost. For many who do this, it is also about the peace of mind they get when they secure a great product to last for a few years (or more). This means their mortgage payments are very much under control whilst other costs increase all the time–so the roof over their heads is secure for them and their families.
If you are worried about inflation and how it could affect your mortgage, please contact us on 020 7220 5110, visit our website Coreco to see more information, or fill out a contact form so we can call you back here. Also, please use our find your mortgage tool to see what you might get for your situation prior to talking to us.