Exploring How Inflation Challenges the Mortgage Landscape

Tightening the purse strings has become commonplace in the UK over the past couple of years. Everybody’s feeling the pinch as inflation continued to remain high at 8.7% in April 2023 - though, thankfully, not quite as in October 2022, when inflation hit a 40-year high of 11.1%.

The Bank of England expects inflation to continue to fall in 2024, with 3.1% forecasted for the tail end of 2024.

For homeowners and property hunters, one of the main concerns with rising prices is how that affects your mortgage. Regardless of whether inflation falls as predicted this year, it’ll still have a lasting impact on the property buying landscape.

Learn more about the effects, to stay on top of your finances and prepare for current and future changes to mortgage rates.

How Does Inflation Affect Mortgage Rates?

Inflation has a direct impact on mortgage rates, especially when it stays high for an extended period of time.

The Bank of England has already increased mortgage rates a number of times since inflation began skyrocketing. As of February 2024, the bank rates stand at 5.25% (the highest it has been in 15 years) with mortgage lenders adjusting their rates to match.

For reference, in December 2019, the bank rate was 0.75%, showing just how much it has jumped in the space of five years.

If you’re looking to take out a new mortgage, these interest rates are going to increase the value you’ll be required to pay back over time on the same loan.

Mortgage Approval Is Harder

Securing a mortgage is difficult at the best of times, especially when you’re a first-time buyer. Pete Mugleston, Managing Director and Mortgage Advisor at Online Mortgage Advisor, explains “40% of our customers were declined before coming to us” prior to the cost of living crisis, and that figure will only have gone up.

This is because rising interest rates make mortgages harder to pay back, increasing the cost of monthly repayments and the amount you’ll need to meet lender requirements. Affordability tests become stricter and what was once a mortgage in your sights may now be out of reach.

That’s not to say that being approved for a mortgage this year is impossible. But you may have to lower your expectations on the amount you’ll be approved for. With that in mind, there has never been a greater need to use a broker to help match you with the right lender and find the most suitable deal.

Does Inflation Reduce the Value of Current Mortgages?

One of the upsides of inflation is for current homeowners with fixed-rate mortgages. Your monthly repayments remain the same, but the current value of those repayments - as well as your overall mortgage - is reduced by the spike in inflation.

For example, a mortgage of £200,000 in 2021 will now be the equivalent of £168,000 when adjusted for current inflation. Of course, that only balances out if your wages increase, too.

Though right now you may still be feeling the pinch, wages do eventually catch up to inflation, and when they do your monthly repayments may feel like less of a sting to your bank balance.

Will Monthly Mortgage Repayments Increase?

Unfortunately for homeowners not on a fixed-rate mortgage or for those whose fixed-rate comes to an end this year, you won’t feel the benefits of unadjusted mortgage rates. Instead, you’re likely to see monthly payments increase to match the rising interest rates.

If you’re concerned about increases in your payments, we recommend speaking to your lender about extending the term of your mortgage instead. Though not ideal, it does give you a little breathing room right now to help tide you over.

Interest-only mortgage repayments are another short-term solution. Though you won’t be reducing your debt, you’ll still be meeting monthly repayments and can feel a little calmer whilst you adjust your financial situation to suit inflation.

Final Words

Inflation in the UK has certainly changed the mortgage landscape, making it harder to be approved at the current time.

If you think you’d struggle to make ends meet when looking at the 2024 interest rates, hold off until wages increase in line with inflation or interest rates stabilise.

We recommend always speaking to a financial advisor, your mortgage lender, or someone you trust to ask for help, and remember that you’re not alone right now.