Rising inflation: What it means for your mortgage

The latest hike in inflation - taking the rate to 2.3% its highest level since September 2013 - has led to 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.

Those mortgage holders who are sitting on their lenders standard variable rate (SVR) 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 an interest rate 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 this year.

“The Bank of England has made it clear that household spending is one of the key measures it’s looking at when deciding where interest rates go from here,” says Laith Khalaf, senior analyst at Hargreaves Lansdown.

“The odds on an interest rate rise are now close to even stevens. One dissenting voice in the latest Monetary Policy Committee decision to keep interest rates on hold was pounded upon as evidence of the start of a shift in policy.”

With more than a third of homeowners currently sitting on their lender’s SVR, a rise in interest rates could put a serious dent in their wallets, according to London & Country (L&C) Mortgages. Inflation could see us all having to part with more money to buy the essentials, one way to recoup some of that cash could be to remortgage off that SVR.

“With the cost of living on the rise and day to day expenses such as energy prices soaring, it is hugely concerning to see that people are paying so much more than they should be,” says David Hollingworth, associate director at L&C Mortgages.

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. If you aren’t on a fixed-rate deal you may be enjoying cheap repayments now but they could rise and if the rate starts rising there's no telling how quickly and how high it will go.

You would not be able to handle base rate rises

If you're just about getting by at the minute and any rate rises would leave you unable to make ends meet then you should be looking at fixed rate mortgages now.

You want to avoid future interest rate uncertainty

There are plenty of events on the horizon which could affect inflation and interest rates, including Brexit and the prospect of a Scottish referendum. If you opt for a long-term fixed rate deal now, say for five or even 10 years, you will lock in a rate that means your mortgage repayments won’t be affected if political uncertainty has a knock-on affect on interest rates.

Don't remortgage if...

You did so recently

There have been some great low rates around recently so if you recently remortgaged onto a super low tracker rate, and you are happy to risk – and can afford – higher repayments if interest rates do rise, you may want to stick with what you’ve got.
 

Published: 15 February 2011
Last updated: 28 May 2017

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