What does rising inflation mean for your mortgage?

What does rising inflation mean for your mortgage?
Inflation, or the rate of increase in living costs, reached a six-month high of 2.7% in August. The drivers of the increase were rising prices for recreational goods, transport and clothing.

When inflation rises or falls, it can have a significant impact on mortgage rates because the Bank of England uses the rate of inflation to help it decide whether the base rate should go up or down.

Here’s what you need to know.

How is inflation measured?

There are two main measures of inflation, the Consumer Prices Index (CPI) and the Retail Prices Index (RPI).

Both look at the prices of consumer goods we spend our money on, such as food, drink, and going out, but the RPI includes housing costs such as mortgage interest payments and council tax, whereas CPI does not.

CPI forms the basis for the government’s inflation target that the Bank of England’s Monetary Policy Committee is required to achieve.

What level is inflation currently at?

The CPI, which is the government’s preferred measure of inflation, reached 3.1% in November 2017. It then fell back until July this year when it rose to 2.5% before increasing to 2.7% last month. RPI stood at 3.5% in August.

CPI is still much higher than the government’s 2% target. When inflation is high, this puts pressure on households as wage growth often struggles to keep pace with steeper living costs, squeezing income in real terms.

However, latest official data shows wage growth is still rising by more than inflation, with earnings growing by 2.9% in the three months to July.

Where next for inflation?

If inflation continues to rise, this increases the chances of the Bank of England raising interest rates to help take some steam out of the system, particularly as wages are going up.

Raising rates helps lower inflation because it means borrowing costs increase, helping slow the pace of economic growth.

The base rate last increased in August, when the Bank of England’s Monetary Policy Committee voted for a quarter percent increase from 0.50% to 0.75%. However, many commentators claim the latest inflation rise may only be temporary, and that given current uncertainty surrounding Brexit, we’re unlikely to see an interest rate rise in the next few months.

That said, no-one can be certain when the next rise will happen, so if your mortgage rate is variable, it’s important to consider how you might cope with potentially higher monthly payments.

If you’re worried about managing higher costs, you may want to consider remortgaging to a fixed rate deal, so that you’ll have peace of mind your payments won’t change if rates do go up. Always remember to look at the overall cost of any deal, including arrangement fees, rather than focusing on the headline rate alone. Seek professional advice if you’re not sure which deal is likely to be best for you based on your individual circumstances.

Call our expert
advisers now
Call free from mobile or landline
Open 7 days a week