Rising inflation: What it means for your mortgage

15 February 2011

The latest hike in inflation - taking the rate to 2.9% (using the Consumer Prices Index) - 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, a rate rise could be on the cards for later 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.

But Ben Brettell, senior economist at Hargreaves Lansdown, adds: “Just one member of the Monetary Policy Committee, Kristin Forbes, has been voting for higher interest rates, and she leaves the Committee next month. The balance of probability suggests the Bank will continue to ‘look through’ higher inflation and leave rates on hold to support the economy, but if inflation continues to surprise we could start to see members revising their positions.”

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.

In reply to by anonymous_stub (not verified)

I am on SVR with 1 years 6 months left , doubt I could get a fixed rate for such a short time . Usually two years is the minimum.

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