A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Lately, living costs have increased and the cost of borrowing has also gone up. This understandably leaves many of us feeling worried about the state of our finances. Let’s try to understand the bigger picture behind this and what this all means for us.
What is inflation?
Inflation is how much prices have changed from one year to the next, and it is the term that economists use to describe the change in purchasing power of our money. They measure inflation by comparing what money can buy from one year to the next.
At present, inflation is primarily caused by supply and demand imbalances. In particular, low supply and high demand for the energy to power our homes, and the costs of certain other goods and services. The gas to heat our homes has become less available due to the reduction in supply from Russia that historically has been one of the major producers are exporter of gas into Europe and the UK.
The world has also recently come out of the COVID-19 pandemic and businesses have started up again which was great news but they simply could not produce things fast enough, leading to inflated prices for items like food. Some economics have also argued that Brexit is specifically impacting the costs of goods coming and leaving the UK, further contributing to inflationary pressure.
How does inflation affect the cost of borrowing?
The Bank of England is the UK central bank. They provide banking services to the UK Government, to other central banks, other commercial banks and financial firms. They do not provide banking services to the everyday consumers.
The Bank of England is responsible to set their “base rate”, also called Bank of England Base Rate.
This is the standard loan rate that the central bank offers to the other commercial banks. These commercial banks often have their own unique rates for customers that fluctuate in line with the changes of the Bank of England base rate. Some mortgage product rates are also directly linked to the Bank of England base rate, and they are called tracker mortgages.
The Bank of England uses the base rate to control inflation. When inflation is high, they increase the base rate, which in turn makes borrowing more expensive for customers and encourages them to save money instead.
Now, if we go back to the conversation about inflation and analyse supply and demand, a higher Bank of England base rate will have the effect of impacting consumers’ demand for goods and series, as well as reducing business’ appetite to take on more debt and to invest . When people are less keen on spending money, it creates less demand which in turn drives prices down. So currently, with inflation rising, the Bank of England is increasing base rates to try and reduce spending and prevent things from getting worse.
What about mortgages?
As the Bank of England base rate also represents the cost of borrowing for commercial banks, a higher base rate means higher borrowing costs for banks. In turns, higher borrowing costs from banks will translate into higher mortgage costs for consumers. And this is why interest rates for these loans are directly impacted by inflation, with higher inflation resulting ultimately in higher borrowing costs for everyone.
With interest rates, energy bills and taxes all rising in the current environment, things can become quite stressful for households. If you are on a fixed rate mortgage, and your rate is not due to expire anytime soon, you will still benefit from the fixed mortgage payments. However, if you are on a variable rate, or if your fixed rate deal is due to end soon, it may be a good idea to review your situation.
Please remember that a mortgage is a loan secured against your home. Your home may be repossessed if you do not maintain repayments on your mortgage or any other load secured against it. You may have to pay an early repayment charge to your existing lender when you remortgage.
Speaking to an experienced mortgage adviser is always a good idea, to understand the options available to you. There are several remortgage deals London available whether you are based in London or elsewhere in the country.
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Luca BertolinoMortgage Expert
Your Mortgage Experts is led by Luca Bertolino with 20 years experience in financial services and in the property market. Through Luca’s wealth of knowledge and expertise, Your Mortgage Experts have become a trusted adviser that clients have come to rely upon for all their mortgage and protection needs.