The UK has seen major rises in inflation, when the price of everyday goods and services rise, within the last few years. The Bank of England (BoE) allows for inflation of 2% but, when it increases beyond 2%, they need to raise interest rates to counterbalance this. This has led to spikes in mortgage payments. As of May 2024 (for the first time since 2021), inflation fell to 2%, the target set by the BoE. They have not yet reduced interest rates in response to this, however this is expected to happen in the next few months.
To mitigate the effects of inflation on interest rates, we also need to understand the impact that inflation can have on our monthly mortgage payments.
In this blog, we will look at ways to make sure you aren’t paying more than you should.
Did you know...
With a fixed mortgage rate, the rate of interest agreed from the offset remains the same. This means that even with the rise in costs, your mortgage payments will remain the same. This can be a good option if you are concerned that interest rates or inflation may rise, but fixed rates may mean that when interest rates drop, you could be paying more than if you had a tracker or variable rate mortgage.
Another mortgage option is a standard variable rate mortgage (SVR or adjustable rate mortgage). Unlike a fixed mortgage, it fluctuates with inflation rates. If interest rates increase, so do your mortgage payments, meaning this kind of mortgage is better when inflation and subsequent interest rates are low. It’s also worth noting that with this type of mortgage, you don’t have the security of knowing that the interest rate you pay will stay the same throughout the length of your deal, no matter what happens within the market.
Tracker mortgages are a form of variable rate mortgage where the interest rate is set to the base rate determined by the Bank of England. As the base rate changes, so do your mortgage payments. A discounted mortgage is also a type of variable rate mortgage. As the name suggests, the initial interest rate is lower than the standard rate and applies for a specific period. The rate can still change in line with the SVR, but it remains slightly lower.
