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Inflation and mortgage rates Posted: 9th October 2022
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Inflation is affecting all of us – from our energy bills to our food shopping and petrol prices, everything is more expensive than it was this time last year. However, the change that could have the most impact on our pockets is the increase in mortgage rates.

The UK inflation target is 2%, but in August, inflation fell back to 9.9% from a 40-year high of 10.1% in July, according to the ONS (Office for National Statistics). Experts believe it could increase again this month as our energy bills increase and the economy reacts to the mini budget announced in September.

Inflation and mortgage rates?

When deciding whether to rise or cut interest rates, the Bank of England looks at several factors. Inflation is one of these – when inflation is high, the Bank of England tries to mitigate this by raising interest rates with the view that this will filter into the cost of borrowing, so shoppers can’t afford to borrow to buy. This dampens demand, causing inflation to fall.
When inflation is low, interest rates are cut to encourage spending rather than keep money in savings accounts – this in turn, drives demand for goods and increases prices.

Faced with soaring inflation, the Bank of England has responded by raising interest rates this year. In February, it went from 0.25% to 0.5%, and it has now reached 2.25%, which is the highest level since 2008. Economists believe interest rates will rise further, hitting around 6% by spring 2023.

When interest rates rise, so do mortgage rates. Over the last few months, mortgage rates have risen steadily. The average two-year fixed rate is now 6.2% – the highest level in 14 years, according to analyst Moneyfacts.

As we move towards 2023, further interest rate rises are predicted, with rates reaching 3.75% by the end of this year and peaking next autumn at around 4.5%.

Whether the interest rate rise affects your mortgage depends on which type of mortgage you have. If you are on a fixed-rate mortgage deal, you will be shielded from any interest rate hike until your deal ends. If you’re on a tracker or standard variable rate (SVR) mortgage, you’ll see an increase in your monthly repayments.

Once your fixed rate ends, you’ll find that a new fixed-rate deal will be more expensive. Many homeowners who took out a 2, 3 or 5-year fixed rate coming to the end of their deal could go from between 1% and 2.5% and could find that their next deal could be around 4% to 6%.

It’s essential to check when your deal ends. If you still have six months to go, look at a new deal now. You’ll find that you can reserve a new rate or pay the charges to exit your deal which could save you more money in the long run. We advise that you talk to a mortgage broker who can advise on the best course of action.

If you can, it’s a good idea to overpay your mortgage to mitigate any rises in the future. By doing this, you’ll pay less interest over the life of your mortgage.

House prices

In terms of house prices, they appear to still be climbing albeit they have slowed down in the last few months. Halifax recorded annual house price growth of 11.5% in August, easing back from 11.8% annual growth in July. The average UK property now costs £294,260.


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