Rising inflation: What it means for your mortgage

The latest hike in inflation - taking the rate to a 26-month high of 4% - has led to further speculation that the Bank of England (BoE) will increase interest rates.

With the cost of living rising but the value of our money staying the same, times are hard. But, for mortgage holders, if the government does decide to increase interest rates to slow inflation, it could actually get worse.

Will interest rates rise in 2011?

Those mortgage holders who are sitting comfortably on their lenders standard variable rate will face an increase in their repayments when rates rise, so finding a good remortgage now could be the best option.

But how likely is a rise?

The general consensus is that while the Monetary Policy Committee will not rush straight into a rate rise as a result of the inflation hike, it will probably raise rates sooner than it would have done.

Initially, it was thought we would see a small rise in interest rates in the last quarter of this year but experts are now predicting this could come late spring or early summer.

"I believe that ultimately rates will rise, although the BoE will probably now wait until the next GDP figures are released in April", says Andrew Montlake, director at mortgage broker, Coreco.

Melanie Bien, director of mortgage broker Private Finance, says those wanting to remortgage should think about acting now.

"As expected, inflation has risen again which will pile more pressure on the BoE to raise interest rates," she says. "We expect the money markets to respond to the figures, factoring in an interest-rate rise sooner rather than later, which will push up the cost of fixed-rate mortgages in particular in the short term.

"Those borrowers keen to take out a fixed-rate mortgage in the next few weeks or months may therefore wish to fix sooner rather than later. There are still some very competitive rates available but these are expected to rise."

Read our round-up of the best mortgage rates

What should you do?


You like the security of a fixed rate

Fixed rate mortgages mean you know exactly what you're paying each month. You may be enjoying cheap repayments now but they will rise and once the rate starts rising there's no telling how quickly and how high it will go.

Experts are predicting a slow and steady rise but with inflation adding pressure to the BoE this isn't for certain. Indeed, the Organisation for Economic Co-operation and Development says interest rates need to hit 3.5% by the end of 2011.

You would not be able to handle base rate rises
If you're just about getting by at the minute and any rapid rate rises would leave you unable to make ends meet then you should be looking at fixed rate mortgages now. Even if rates don't rise until late Spring, remember it takes time to find and finalise a mortgage so it's not something you should leave until the last minute.


You can take a little more risk

If you're handling your remortgage payments with ease and you could handle it if your repayments starting creeping up then you could consider holding fire for a few more months and getting the most out of your lenders standard variable rate.

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Your Comments

You say: "But, for mortgage holders, if the government does decide to increase interest rates to slow inflation, it could actually get worse."

How long ago was it the government last set interest rates?

This inflation rise is very likely caused entirely by a commodities price bubble that is about to burst. I agree with Mr. Vince Cable that internal price inflation is very likely to be flat or negative. A deflationary crash is just around the next corner; unless we get a huge QE3 (or would that be QE4?).