It feels like there was never a time we weren’t talking about the rising cost of living and how things are just so much more expensive these days. Inflation is the culprit behind these rises, including the increase in your mortgage payments. The good news is that inflation seems to be falling and although it will continue to be a rollercoaster of ups, downs, and loop-the-loops, it may possibly mean that your money will stretch a little further.
What is Inflation?
Inflation is the steady increase in the general price of goods and services, that is fundamental to our economy, impacting various aspects of our lives. At your weekly food shop, you may notice that the price of milk is slightly more expensive every week, or when you fill up your car with petrol you may notice the price hitching higher and higher. The difficulty comes when prices rise faster than the working wage, which causes most households to feel the pinch and stop spending money on things that aren’t deemed essential. Mortgage rates are no exception. As inflation rises, it sets off a chain reaction that can lead to changes in the cost of borrowing money for purchasing homes.
How Are Inflation and Mortgage Rates Connected?
The central driving force in how inflation affects mortgages is the supply and demand for money in the economy. When inflation rises, the purchasing power of money decreases, causing prices for goods and services to climb. To counteract this loss in purchasing power, lenders often increase the interest rates they charge for loans, including mortgages. This adjustment helps lenders maintain their profit margins in the face of higher costs. As a result, mortgage rates tend to rise when inflation is on the upswing.
The UK inflation target is 2% and right now we sit at 7.9% which is a huge improvement from 11.1% in October 2022. Time spent above this 2% target increases the chances of the Bank of England hiking interest rates to try and bring inflation back under control and vice versa. If inflation is very low, interest rates may be cut to try and encourage spending in the economy rather than keeping money in savings.
How Will Inflation Affect My Mortgage Payments?
We now know that inflation rises cause an increase in goods and services and mortgages are no exception, but not everyone experiences an instant increase in their monthly repayments, they also won't see an immediate decrease in payments during a decline. How quickly you see an increase or decrease depends on the type of mortgage you have.
Impact on Fixed-Rate Mortgages.The beauty of a fixed-rate mortgage is that it offers stability and predictability in your monthly payments. Regardless of what happens to inflation and subsequently interest rates, your payment amount will remain the same until you come to the end of your contract. At present, it is highly advantageous to be locked into a fixed-rate mortgage, as inflation is high but on the flip side, when inflation lowers, it could mean that you are paying much more than those on a variable or tracker mortgage. It can also be quite a shock to the system when it comes to remortgaging after the end of a fixed-rate deal, as presently, prices are so much more than when you first entered your original fixed-rate deal.
Impact on Variable and Tracker Mortgages.Variable and tracker mortgages track the Bank of England's base rate, so these types of mortgages are much more of a gamble on how much your monthly repayments will cost. In times of rising inflation, borrowers on variable and tracker mortgages may experience more frequent and significant rate adjustments, this can lead to higher monthly payments, making it essential for borrowers to prepare for potential rate increases. Conversely, during periods of low inflation, borrowers on variable and tracker mortgages might benefit from lower interest rates.
What Can I Do to Help the Effects of Inflation on my Mortgage?
We are on the right side of the curve for now, with inflation slowly decreasing, however, there may still be base rate rises ahead. Keeping up-to-date and as informed as possible is your best chance of ensuring you keep the effects of inflation on your mortgage payments to a minimum.
1. Check when your current fixed-rate deal ends. If your current fixed-rate deal is coming to an end, start looking early to find the best deal to remortgage. Some lenders will allow you to lock into a new deal between 3 and 6 months before your old one expires, so it pays to be proactive.
2. Extend your mortgage term. Extending your mortgage term could help to reduce the cost of your monthly repayments in the short term, albeit costing you more in the long term.
3. Switch to interest only. Only paying the interest each month and none of the debt means that your monthly payments right now will be reduced, but it’s important to note this will not impact your mortgage balance in the long run.
4. Overpay if Possible. If you can afford it, overpaying on your mortgage can help to make it more affordable. The higher rate of interest you are being charged will be applied to smaller amounts of mortgage debt and it also means that you will pay less interest on the life of your mortgage.
5. Speak to a Reliable and Helpful Mortgage Advisor We are TaylorMade, the leading mortgage broker in Manchester, equipped with the knowledge, experience, and know-how to ensure that you understand your personal circumstances in times of high inflation, what’s available to you, and provide the best deals on the market today.
If you want to find out more about how we can help you navigate this time of uncertainty, speak to our reliable team. We are on hand to help guide you through worrying financial times and provide the advice and support you need to make informed decisions.
Contact us at TaylorMade today, a leading mortgage broker in Manchester.
