How does inflation affect mortgage rates?

[Pegs11]

Just seen the news about inflation reaching 9%. I don’t understand exactly how this will affect mortgage rates. I can only find generic information online that says mortgage rates “will rise”… but I need to get a better idea of how much by.

Let’s say I want to borrow an extra £100k from my mortgage provider. I’m currently looking at an interest rate of 2.59%. Let’s say that rate will be increased soon (due to 9% inflation). What will the interest rate go up to? I know it’s impossible to be precise, but I really need to get some idea, if possible, so I can plan...

In order to control inflation, the Bank of England will need to increase Bank Rate. They've been delaying and delaying because they're worried about recession, but they'll have to eventually. That makes it more expensive for high street banks to lend so they'll put mortgage rates up.

No-one has a crystal ball to tell you what the rates will go up to and when, but you'd be wise to stress test whether you could service the mortgage if rates went up 2%, 5%, 10% etc. You could also fix the rate of course - it's always a bit of a gamble but probably better than uncertainty!

Ideally you would lock in at a fixed rate for 2 years or maybe 5 or 10. Inflation is controlled by increase in interest rates which is set by the Bank of England.
Current base Bank of England rate is 1%, anticipated to be 3% by the end of the year. Mortgage providers tend to be between 1 and 3% higher than this.
The way to keep inflation low is to have interest rates higher than inflation.
So it's possible, although unlikely, that if inflation goes to 10% and stays there, base interest rates would go to 10 or 11%, with mortgage rates around 12 to 14%. This happened in the 80s and early 90s. It's more likely that the average mortgage rate for a lender will be around 7% in a year. Probably wise to use that figure in calculations for affordability on top of price inflation of 10% on other expenditure.

Thanks both for your replies. Do you think it might be worth us borrowing more now, on a (still low) fixed rate, with a view to porting the mortgage when we move in a few months time? We will probably need to borrow an extra £150k to move. I can’t work out if it might be a false economy to remortgage for that amount now (our provider’s current interest rate being 2.54%) Or if we should wait and see what happens in, say, six months when we will hopefully move. I have no clue whether that might be a good idea or not!

Well interest rates certainly aren’t going to be lower in six months and are likely to be higher. So if you can do it then I don’t think it’s a bad idea……you might not be able to though as you currently don’t have a house worth that much as collateral? Unless you have loads of equity in which case you’d probably be able to. But be up front with a mortgage advisor about your plans because they’ll be able to advise on any pitfalls? Is there a time limit that you can’t Porter it in the first six months for example? What if house prices go up and you haven’t borrowed enough, can you add more to it?

Definitely get a lower fixed rate for the highest LTV you can on your current house and port. We did that before our last move and got a really low rate that we are just running out of now. Already got my remortgage product in December in anticipation of rising rates. You get 6 months to decide anyway. Hurry.

@QuebecBagnet We can definitely remortgage for some amount, maybe £90k-£100k. But then we’d need to borrow more again when we move, to make it up to the £150k we need. I don’t know if you can remortgage twice!

I would also need to check if there are any 6 month tie-ins relating to porting. I’ll speak to my mortgage provider and see what they say.

Of course it does mean our monthly repayments would increase. We would be using the cash we get out of remortgaging to pay the mortgage monthly repayments, I guess.

Experts are saying they expect base interest rates to be about 3 or 3.5% interest by the end of the year. Mortgage rates will always be slightly above the base rate. So you could be looking at variable rates of about 5%. If you want to fix then a fix will be more than the variable rate. www.standard.co.uk/news/uk/why-are-interest-rates-rising-how-high-could-they-go-b998449.html

you can use this calculator to work out payments depending on rate. www.n-ram.co.uk/helpful-tools-calculators/rate-rise-calculator

@QuebecBagnet thank you, this is very helpful! We REALLY want to move so we are prepared to take a bit of a hit with the mortgage rates… I reckon we can cope with mortgage interest rates going up to 5%, but 10% would be pushing it 😏

I don’t think it will hit 10%, certainly not in the next six months. The Bank of England will want to be cautious as much as they can and increase gradually and give it time for the increase to have an effect. For a long time any changes have been I think at 0.25%. Saying that if inflation does go bonkers they might think they want to act a bit quicker and make a bigger jump.

someone was saying on the news earlier that this is because of covid and worldwide lockdowns resulting in shortage of materials so it should start to improve, but he did say that while interest rates can be quick to rise they will be slow to come back down.

Plus house prices might start to fall at some point, so if you can take the interest rate hit you might be buying in a better buyers market. House inflation has fallen from 11% to 9% so already possibly signs of the market slowing (still currently rising but for how long).

@QuebecBagnet yeah i suppose it might balance itself out, if the housing market becomes better for buyers. We’ve actually been trying to move house for three years but haven’t been able to find anything, there is hardly anything on the market at the moment and it’s been like that for ages. And for the scant few houses there are, the competition is really fierce, so the prices are massively inflated… and even then people are offering well over the asking price as there are just so many people all going after the same house. I hope it won’t carry on like this too much longer.

I'm not convinced that the BOE will need to raise interest rates to control inflation. Most of the inflation we are seeing isn't caused by increasing demand*(demand-pull inflation), but by increasing costs (cost-push inflation) and by a particular subtype of cost-push inflation: supply shock.

If we were in a time when there was plenty of money sloshing around and people were looking for things to spend it on, then raising interest rates would help to reduce demand and slow down the rise in inflation. Despite near full employment and rising wages, that's not the primary cause of the rises we're seeing imo. I think it's mainly supply-side disruption caused by the combination of war and sanctions.

The war in Ukraine and sanctions against Russia has reduced the supply of, and therefore increased the global price of oil, gas, wheat and CO2 (the last has led to a big rise in fertiliser prices, which may lead to farmers using less and a fall in yields, and therefore supply, plus it's used a lot in food packaging).

A rise in interest rates won't necessarily change any of that.

I think there's a real risk that increasing interest rates too far, too fast could tip us into recession and job losses, aka the dreaded stagflation. I just hope the MPC have strong nerves and steady hands.

This feels very different from previous periods of high inflation I've lived through during the 70s and 80s. And relying on interest rates to control inflation is a relatively new thing, which only started in the UK under Thatcher and her belief in the Friedmanite school of thinking.

I'm more fearful of our economic future than at any time in my 66 years.

*There may be a small increase in demand because wages have risen, but there's also a real possibility that, overall, wage increases will just be eaten up by inflation.

No advice on what will happen to interest rates but just confirming that you can have more than one mortgage. We have 3 on our house, each a different fixed period and rate. They total around 50% value of the house

@LakieLady exactly this. Current inflation isn’t caused by rocketing house prices, it’s caused by the huge (and not necessarily needed - see record profits) energy prices. Raising interest rates won’t affect that one jot. It will just further impact the average person and impact their disposable income. The more hits on household expenses, the less the average household will have to ‘spend’ and boom recession time.

however, this govt are working on a ‘protect dividends/shareholders/large company owners basis.

so, read up on what happened in the 80s (the last time the uk let the Tories fuck everything) and Google Negative Equity.

I would not be borrowing more right now.

I'd fix now as whilst interest rates may not go sky high, and may not be useful to control cost-push inflation, b of e is unlikely to cut them for some time given high inflation.

So in the next 2-3 years I can't see interest rate cuts happening so I'd fix now and port to rule out the risk of rate rises.

Latest statement from the Bank was that perhaps 20% of the inflation was caused by UK factors, while 80% was international. But there will be pressure to 'do something' as there's nowt they can do about the international factors. Hopefully it won't be another load of QE, inflating house prices further!

The other thing about inflation is that it decreases the value of the debt, in real terms.
Depending on your attitude to risk you might look at that in more detail, if you can service the debt comfortably that is.

It’s likely the BoE will increase interest rates on June 16 (the date of their next review). Therefore I’d fix a rate now, as opposed to after then, as guessing you might be looking at around 3% when that kicks in.

Hi all, thanks for the thoughts and advice you’ve shared. I have been able to determine two things in the last 24 hours:

1. I can’t borrow more from my existing provider against my current property, unless I can evidence that it’s for something material like home improvements (not just because I want to lock in a low rate while I still can).
2. Some mortgage rates have already gone up in response to inflation, based on where the money market expects rates to go, rather than changes the B of E has made. (This is according to an independent mortgage advisor I managed to speak to very briefly this morning.)

Neither of those things help me much. I’m going to speak to the independent mortgage advisor in more detail on Monday, just in case there is anything they can do for me.

The likelihood is that we won’t be making any offer on a property for at least 3-6 months. I’m very concerned about how much interest rates might have climbed by that point!

If you remortgage now what early repayment fees would be due?

@NotDavidTennant We only just renewed our mortage a few months ago (and it’s a 5-year fixed rate mortgage) so the fee would be sizeable… about £7,000 I think.

The 80s price crash was a complete horrorshow and lasted a long time. The house I'd bought in '82 for £24k was valued at £87.5k in '87. I sold it in '93 for £49.5k. I bought at virtually the same price, and it was late in the 90s before it reached it's pre-crash level.

Unless I had significant equity, eg 50%m or more, I wouldn't be increasing my borrowing now.

Turns we can’t easily (or cheaply) borrow more now. We have to wait until we have sold our house, and had an offer accepted on a new house. I don’t know how long that will take and what interest rates will be by that time, but it looks like we don’t have any choice.

It all means that we will have to look for somewhere significantly cheaper than what we thought we could afford. Which is depressing. I wish we didn’t have to move at all, but we are very unhappy where we are 😒