Rising inflation: What it means for your mortgage
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.
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?
DO REMORTGAGE IF...
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.
DON'T REMORTGAGE IF...
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.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.