Are you concerned about inflation and increasing costs? You’re not alone. The rising cost of living is impacting all aspects of daily life. To understand how you and your mortgage may be impacted, we explore this topic with Chief Operating Officer Greg Cunnington, who’ll take a look at the impact it’s having on the mortgage sector for both new and existing borrowers.
There’s no escaping the increasing costs. According to OFGEM, the energy cap (currently at £1,277 a year) will be increased from April and national insurance contributions for the employed and self-employed will rise by 1.25% to fund social care. The invasion of Ukraine has also caused the cost of commodities to increase. Whilst the list seems never ending, there are solutions available to help clients manage affordability. Especially when it comes to mortgages.
What is inflation?
In a nutshell, inflation is the rate at which the prices of goods and services have increased. It’s measured with the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). These indexes measure the prices of general consumer goods and compare them to the previous year. From that, the difference is expressed as a percentage. Both CPI and RPI look at products like groceries and alcohol, but RPIs also include housing costs and mortgage repayment costs.
How does inflation affect my mortgage?
Inflation significantly impacts decisions made by the government and by businesses. The Bank of England uses it establish interest rates. For example, if they expect inflation to rise above 2% then they may increase interest rates or, if inflation drops below 2%, they might reduce interest rates.
As a result, inflation critically impacts the price you pay for a mortgage. If interest rates go up, anyone looking to get a new mortgage will have to pay a higher rate of interest than they would have done previously. Alternatively, if you are currently on a tracker (or variable) mortgage then you can expect your monthly payments to go up.
Inflation and mortgages for existing borrowers
There are two types of existing mortgage borrowers; those on a fixed rate, and those who are on a variable rate.
“For those on fixed rates, those costs will be locked in until the fixed rate period ends” said Greg. “However, for those on a variable rate, they may be more likely to feel the squeeze through their household budgets. It’s a necessary increase which will see almost all aspects of daily life impacted, from paying bills to purchasing food. In doing so, some households may struggle to pay their mortgage as the cost fluctuates”
He went on to urge people to seek advice if they’re variable rate is of concern. “We’re seeing more and more clients get in touch with us about securing fixed rates before the repayments become unaffordable. If you are interested in locking in a fixed rate for 1, 2 or even 5 years, our advisers are on hand to help.”
Inflation for new mortgage borrowers
“Generally, I think we’ll see a dip in the market as mortgage applications reduce from peoples’ lack of affordability” commented Greg. “Increasing costs mean that deposits won’t go as far as they would’ve done previously, and that’s before you’ve even considered the cost of moving!”
“Lenders will also have to factor in increased costs, particularly on utility bills, which may squeeze the amount you can borrow.”
“When applying for a mortgage, ensure you can competently present your affordability and sources of income or funds. This will help lenders during the application process. Additionally, now more than ever is a time to be conscious of your spending. With the cost of living increasing, be mindful of your outgoings.”
“Once your application has been accepted and a mortgage offer issued, the mortgage rate is set until you complete. We have access to lenders that lock in these rates for 6 months offering you a longer timeframe.”
Inflation is unavoidable but if you are worried about your affordability, do not be afraid to get in touch. Our extensive range of lenders offers us priority access to new products with the most competitive rates and enhanced affordability calculations. To speak to one of our expert advisers, call us on 020 3903 9875 or email firstname.lastname@example.org.