This year inflation has hit a 40 year high, with lots of our everyday essentials now costing more than ever before. Inflation is the measure that is used to compare the prices of goods and services with how much they cost at the same time last year. Inflation highs like we currently have were last seen in the late 1970s.
In order to curb the continual uplift of prices, the Bank of England (BoE) uses the Base Rate as a tool. Each time the BoE increase the interest rate, people are discouraged from borrowing which in turn reduces spending and therefore people are more likely to save. This lowers the rate of inflation.
The target rate of inflation for a stable economy in the UK is 2% – this currently sits considerably higher. Incremental increases in the Base Rate have started to stall inflation, with the next stop hopefully being a tipping point where the rate of inflation noticeably drops.
When the higher Base Rate starts to have an effect and inflation falls, the BoE can then slowly bring the interest rates back down.
The major drawback for many people is that higher interest rates have a big impact on the cost of mortgage repayments. The most common type of mortgage in the UK is a 2 year fixed term mortgage, which means that the customer pays an agreed amount for two years, and then either reverts to the normal variable mortgage rate, or looks to find a new fixed mortgage product.
Lots of mortgages from two years ago were much lower than they are today. The average mortgage rate in December 2021 was 1.60% (for a £250,000 mortgage of 90% LTV). In comparison, the average mortgage rate today is 5.60%. That ends up being a considerable increase in a monthly cost when the 2-year fixed period is finished. Only if inflation starts to drop will the interest rate then come down. Initially it was projected that this would be at the end of 2023, it now looks to be closer to the end of 2024.
This situation also has an impact on other groups of people. Those that are currently renting may find that their monthly rent is increased, again because of the mortgage rate increase that your property’s owner is having to pay. It also affects anyone with credit car borrowing or personal loans.
If you would like to speak to us about your situation and how the current circumstances are affecting you, then please get in touch.
