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Does Inflation Affect Fixed-Rate Mortgages?

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With a fixed rate mortgage, the rate of interest you pay is fixed for a set number of years. So, does inflation affect fixed-rate mortgages? No, your payments won’t be affected by rising inflation or a higher Bank of England base rate during your fixed period.

During this time period, your payments will remain the same regardless of any changes to the Bank of England base rate or the UK inflation rate.

However, rising inflation means people taking out new fixed rate mortgages are paying higher rates than previously.

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Always remember: your home may be repossessed if you do not keep up repayments on your mortgage.

What is inflation?

Inflation is the rate at which the prices of goods and services have increased over the previous 12 months.

So, if inflation is 4%, it means prices are an average of 4% higher than they were a year ago. For example, if a pint of milk cost £1 a year ago and now it’s £1.04, then its price has risen by 4%.

The Office for National Statistics (ONS) estimates the rate of inflation each month by analysing the cost of a set “basket” of goods and services. This basket has changed over the years and reflects the things people commonly buy such as food, petrol and mobile phones.

There are two keyways to measure inflation: the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). RPI inflation includes certain housing costs and mortgage repayment costs, while CPI inflation doesn’t.

A healthy economy has low-ish and stable inflation. If inflation is too high or unpredictable, it’s hard for businesses to price their goods and for people to plan their spending. If it’s too low, people tend to hold off on spending as they expect prices to fall further.

Why is inflation so high?

The Bank of England is responsible for keeping inflation at a certain rate and currently has a target of 2% set by the government. But as of September 2022, the UK inflation rate stood at 10.1% – so a lot higher than 2%. This means if something cost £10 this time last year it will typically cost about £11.10 now.

Rising energy bills are a major driver of rising inflation. It’s not just households paying higher gas and electricity costs – businesses are too, and they are passing on these increased costs to customers.

Unfortunately, wages aren’t rising with inflation, so we could be worse off than before as our money doesn’t go as far as it used to.

Will inflation rise affect mortgage rates?

If inflation is too high, the Bank of England will try to control it by raising the base rate.

The thinking behind this is that rate rises will filter through into the cost of borrowing. With debt repayments increasing, people will spend less, and prices will come down.

People will also be more tempted to save instead of spending their money as they can get a higher interest rate on their savings. Less spending causes prices to fall and therefore lowers inflation.

How does inflation affect fixed-rate or SVR mortgages?

A rise in the base rate will affect how much mortgage lenders charge for mortgages.

If you’re on your lender’s standard variable rate (SVR), this rate is very likely to go up. If you are on a mortgage that ‘tracks’ the Bank of England base rate, it will definitely go up. Paying a higher interest rate on your mortgage means your monthly payments will be more.

Does inflation affect fixed-rate mortgages? If you have a fixed rate mortgage, you won’t be affected by rising inflation or rising interest rates straight away. Your payments will stay the same until the end of your fixed rate.

At the end of a fixed rate most people tend to remortgage to another fixed rate – but borrowers looking to do this at the moment will find that rates have gone up. People who fixed their mortgage two years ago typically paid an interest rate of about 2%. But when these deals end, a new fix is likely to be around 6%.

If you’re worried about your mortgage payments going up and you think you may struggle to make future mortgage payments. Then it’s important to contact your mortgage lender as soon as possible.

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Always remember: Your home may be repossessed if you do not keep up repayments on your mortgage.

Should I pay off debt during inflation?

Rising inflation and rising interest rates will also affect the cost of other types of borrowing such as overdrafts, credit cards and loans.

If you have savings or spare cash, it may be a good idea to pay down these debts wherever possible, targeting the most expensive debt first. However, we would recommend speaking to a financial adviser who can give advice tailored to your needs.

Last Updated: January 18th, 2024