Bigger than expected drop in inflation could be good news for mortgages

Bigger than expected drop in inflation could be good news for mortgages
Interest rates could rise less sharply than previously expected following latest inflation figures which show soaring price rises are finally starting to cool.

The Consumer Prices Index (CPI) measure of inflation fell to 7.9% in the 12 months to June, according to the Office for National Statistics, down from 8.7% in May. It had been predicted to slow to 8.2%. Price rises were driven down mainly due to falling motor fuel costs and easing food bills.

Despite the fall, inflation remains nearly four times the Bank of England’s 2% target. When inflation is very high, interest rates usually increase to makes the cost of borrowing more expensive. This reduces consumer demand for goods and services and helps take the steam out of rising prices.

Prior to the inflation announcement, markets were predicting that the Bank of England’s Monetary Policy Committee would raise the base rate by half a percentage point in August to help lower inflation. However, the better-than-expected inflation numbers mean that while rates are still likely to go up next month, forecasts are suggesting we may only see a quarter point rather than a half point rise, taking the base rate to 5.25%.

What does this mean for mortgage rates?

Falling inflation and slowing interest rate rises can take a bit of time to feed through to mortgage rates, so homeowners and buyers shouldn’t expect to see much cheaper mortgage costs pulling through instantly.

If you’ve found somewhere you want to buy or your current mortgage is due to end in the next six months, this means it is still a good time to be looking at which options might be available to you rather than waiting, especially as it can take a while to find and secure a deal. You can use our Mortgage Finder to see which deals you could be eligible for now and how much your monthly payments might be.

If rates do come down in future and you’ve secured a rate in advance, you’ll have the opportunity to review your options before your next deal starts and potentially switch to a lower rate at that point if one becomes available.

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