20th September 2024
Inflation is a fundamental economic factor that affects various aspects of everyday life, including the housing market and, more specifically, mortgages. For homeowners or potential buyers in the UK, understanding how inflation impacts mortgage rates, monthly payments, and the overall cost of a home is a great way to know what to budget for. In this article, we'll take a look at how inflation affects your mortgage and how it impacts what you pay.
Inflation represents the rate at which the general level of prices for goods and services is rising, subsequently eroding purchasing power. The Bank of England aims to keep inflation at a target rate of 2%, but variations are common. Higher inflation decreases the value of money, influencing lenders' and investors' behaviours, which directly impacts mortgage rates and conditions.
Mortgage rates in the UK are closely tied to the Bank of England's base rate, which is adjusted in response to changes in inflation. Here's how this works when comparing fixed rate vs variable rate mortgages:
find me a mortgageFixed-rate mortgages are less directly affected by short-term fluctuations in inflation since the interest rate is locked in for the duration of the term. However, if inflation is expected to rise, new fixed-rate mortgage offers may come with higher interest rates as lenders anticipate higher costs and risks. This means that those looking to secure a new mortgage or refinance during periods of high inflation may face higher rates.
Variable-rate mortgages, including tracker and standard variable rate (SVR) mortgages, are more directly impacted by inflation. These rates are often linked to the Bank of England's base rate, which fluctuates in response to inflation. When inflation rises, the base rate may increase to cool down the economy, leading to higher mortgage payments for those with variable-rate mortgages.
Inflation can also indirectly affect the value of property and the real cost of purchasing a home. Below is an overview of the role that inflation can play on real estate prices and the property market generally:
Over time, inflation generally pushes up property prices. While this can be beneficial for homeowners as the value of their assets increases, it poses a challenge for new homebuyers who find prices moving out of reach. This dynamic can exacerbate the affordability crisis in hot markets, making it more difficult for first-time buyers to enter the market.
As inflation increases, the real purchasing power of money falls. This means that even if wages increase, the higher cost of living may prevent savings rates from keeping pace with the increased cost of property, effectively making it harder to save for a deposit or afford a mortgage.
While homeowners with fixed-rate mortgages may be shielded from immediate impacts, the long-term effects of inflation are inescapable. Over time, if wages do not keep up with inflation, homeowners may find their budgets tightening, which could make meeting monthly mortgage payments more challenging.
For those who already own homes, inflation can have a silver lining by increasing the nominal value of their property. This growth in equity can be beneficial, particularly if the property value increases faster than the actual mortgage debt. Homeowners might find themselves in a better position to renegotiate their mortgage terms or secure better rates upon refinancing.
Although inflation typically means changes in market behaviour that lead to higher mortgage rates, there are ways to plan for this issue. You can mitigate the impact of inflation on your mortgage by adopting the right tactics, so consider the following strategies:
If you are concerned about rising inflation and its impact on interest rates, securing a fixed-rate mortgage could provide stability and predictability to your financial planning.
When possible, making overpayments on your mortgage can reduce the principal faster and decrease the total amount of interest paid over the life of the loan. This can be a strategic move during low-interest periods preceding inflationary rises.
Regularly reviewing your mortgage arrangements and staying informed about economic trends can help you anticipate changes in inflation and interest rates, allowing you to make informed decisions about refinancing or adjusting your mortgage plan. In many cases, it's helpful to work with a mortgage advisor, such as one of our team at WIS Mortgages, to help guide your decisions.
Inflation is a powerful economic force that holds significant sway over mortgage rates and real estate values. Homeowners and potential buyers can better prepare and protect their investments by understanding how inflation affects mortgages. While inflation introduces uncertainties and challenges, strategic planning and informed decision-making can help mitigate its impacts on your mortgage and long-term financial health.
If you would like assistance understanding mortgage options, then our team at WIS Mortgages would love to help. Please get in touch with our team today for more information.
As a mortgage is secured against your home it may be repossessed if you do not keep up the mortgage repayments.
Q. How do Rising Interest Rates Affect Mortgage Payments?
A. Rising interest rates typically mean that lenders will pass the increase on to customers. What this means is that when the interest rates go up, so do your mortgage payments. Your lender should contact you to explain any rate changes so you can know what you should be paying.
Q. Will interest rates drop if inflation drops?
A. The fate of interest rates will largely hinge on the pace with which the inflation drops and remains stable. So an environment of low inflation and stability is required. If inflation falls at a faster rate than predicted, then it can cause reductions in market expectations for base interest rates. This, in turn, could drop mortgage rates.
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