UK inflation is down, that’s good… isn’t it?
Recently I was asked, what is inflation? Well, that’s easy to understand – it’s the rate at which anything we buy increases (or decreases) in price measured against last year.
But the next question stopped me in my tracks. Yeah, I understand that, but what I don’t understand is why that’s affecting my mortgage. Surely there’s no connection? What I pay for my mortgage reflects the Bank of England base rate isn’t it? So why the big fuss?
To understand the connection, let’s start with the basics. Did you know there are two types of inflation?
What is Inflation?
As we said, inflation is the rate at which the average level of prices for goods and services is rising. When inflation happens, our £ in the UK buys fewer goods and services than previously. The higher the inflation, the less we can afford to buy.
Have you heard of Core Inflation?
Core Inflation covers a predetermined list of items we usually buy, for example books, cinema tickets, hotels, and haircuts. It doesn’t include anything that could be influenced in the short term by the weather (or bad harvests), political, or economic issues such as energy, food prices, alcohol, or cigarettes.
By excluding these, quite important, items, the theory is core inflation gives a clearer view of the underlying trend in prices – because it’s not affected by short term fluctuations. For this reason, it’s the figure used globally to help set monetary policies.
What does inflation have to do with my fixed-rate mortgage?
If the core inflation rate is going up, central banks – like the Bank of England – try to control how much we’re able to spend by influencing how much we have left after we’ve paid the mortgage (and bills) to pay for the items on the core inflation list.
By increasing the interest rate, mortgage lenders respond by raising the fixed rates offered to new borrowers. First-time buyers, and anyone coming to the end of their fixed rate term, will find mortgage payments are much higher than they were 12 months ago. This is on purpose – with less spare income around, we can’t afford the prices of our favourite brands to increase, forcing businesses to hold off on price rises.
There are other economic and political factors at work when it comes to mortgage pricing, but keeping an eye on the core inflation figure is a great place to start understanding the economics of mortgage lending.
So, what should I do now?
It really does depend on your individual circumstances and our first recommendation is to talk to an expert before making any decision.
As an Expat, with a UK property and mortgage, there are still options available to you and we will work with you to find the best solution.
You do need to accept lenders are changing their offering daily, which can be disorientating when we’re asking you to make quick decisions. However, if your fixed rate mortgage is coming to an end within the next six months, now is the time to talk to us so we can find the right solution for you.
If you are considering a first-time purchase, our recommendation is to do your research before looking for properties. We can let you know how much you can borrow, what the monthly payment will be and even run through your rental income options to ensure your new property is profitable.
With the headlines full of talk about interest rates and inflation, it always helps to know an expert.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE