The ninth increase in inflation in as many months will add further pressure on households battling with the cost-of-living crisis – but it will also have an impact on our mortgages.
The Office for National Statistics (ONS) announced this morning inflation, as measured by the consumer prices index (CPI), had risen by 9.4% in the year to June.
Experts predicted inflation would hit 9.3% – so it surpassed expectations, driven largely by rising prices of fuel and food.
This higher pace of growth is likely to have an impact on the decision makers at the Bank of England when they next meet to discuss interest rates.
A ‘sharp rise’ in interest rates expected in August
Adrian Lowery, financial analyst at investing and coaching platform Bestinvest, said: “Interest rates could rise sharply next month.
“Bank Governor Andrew Bailey yesterday repeated that a half-point increase in the bank rate (which would be the first since the Bank gained operational independence in 1997) is an option for August’s announcement from the monetary policy committee.
“That comes after five consecutive 25 basis point rate hikes as the MPC has targeted rising inflation in recent months.”
Whilst this 0.5% rise was not definite, the financial markets are betting on a 94% chance of the rate going up by this amount to hit 1.75%.
More rises expected in 2023
Since the previous interest rate hikes, which have been coming thick and fast since December, mortgage lenders have been increasing their rates in line.
Moneyfacts.co.uk data revealed the average two-year fixed rate was now 3.74% – much higher than the average 2.55% this time last year.
Adrian thought average rates may rise even higher next year. “Given the speed of rate rises this year, as the mortgage market catches up it is not unrealistic to see the average five-year fixed rate at 5% next year,” he said.
He explained a household with a £200,000 mortgage at 2.78% will currently be paying £926 a month. But if they were to remortgage to a deal that was charged at 5.0%, their monthly payments would rise by £244 to £1,170 – an increase of 26.3%.
What should borrowers do to avoid being hit by soaring rates?
Adrian explained there were two things mortgage borrowers could do to mitigate against the increasing rates.
“One is to switch to the current best deal as soon as they can – and this will usually be three to six months before their fixed-rate mortgage deal is due to expire.
“The second is to consider overpaying on their mortgage in order to bring it down a loan-to-value bracket – e.g., from 75% to 70% – before they remortgage, as this will get them a better rate.”
How will house prices impact rates?
The inflation figures came on the same day the ONS published data revealing the average house price in the UK had risen by 12.8% in May – up from 11.9% in April.
The average property price is now £283,000.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said on the face of it, it seemed as though the market had ‘come through months of trials without showing any weakness’.
But she said there were signs things may be shifting – with house price indices, such as Halifax and Nationwide showing slower growth and mortgage approvals declining.
Sarah added: “A combination of higher GDP figures than expected in May and inflation hitting 9.4% in June, means we’re expecting interst rates to rise again in August by as much as 0.5%.
“And while existing owners are largely protected by fixed rate mortgages for now, new buyers are going to have to factor in higher borrowing costs.”
