Inflation forecast sparks fears for mortgage costs

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Inflation could climb to 4.4% as soon as March next year, adding further pressure on the Bank of England to hike interest rates, impacting the cost of mortgages.

Forecasts by the OBR (Office for Budget Responsibility), which the Chancellor Rishi Sunak set out in his Budget speech today, said that inflation – as measured by the Consumer Prices Index – will continue to rise.

Measuring 3.1% in September, inflation is already running ahead of its 2% target due to a combination of pressure on supply chains since trade re-opened post-Covid, and soaring energy costs. The OBR predicts it will only return to its 2% by the end of 2024.

Forecasts of rising inflation also raises expectations that the Bank of England will peg up interest rates, perhaps by the end of the year. Here’s what that could mean for mortgages.

Interest rates and mortgages

The Bank of England’s highly influential Monetary Policy Committee (MPC), which is responsible for deciding what happens to interest rates, will next meet on Thursday 4 November.

Should the MPC’s nine members vote in favour to increase the base rate in November – say by a quarter or a half of a percentage point – it could add on significant costs to homeowners paying variable rate mortgages. Winkworth, one of London’s largest chain of estate agents, said: “Even a small rate increase can have a marked effect on mortgage repayments that track the base rate… it makes a big difference to people’s budgets.”

For example, if the rate on a £200,000 repayment tracker mortgage taken over 25 years was to rise from 3.5% to 4%, monthly payments would go up by an immediate £53.

Borrowers on fixed rate loans will be sheltered for the duration of the fixed term. But the deals available when it expires will be dearer. Lenders take their cue from movements in the base rate with many already reflecting a likely rise in their pricing.

Record low rates

So what’s been the landscape for interest rates to date? The MPC last met in September, when it voted unanimously to keep the base rate at 0.1%, the record low level it reached at the start of the pandemic in 2020.

And the trajectory had already been on a downward curve during the decade prior to Covid-19.

Rates fell dramatically, from 5% to 0.5%, in the aftermath of the 2008 financial crisis. The rate halved again, from 0.5% to 0.25%, in the wake of the Brexit referendum in 2016.

However, after 18 months of the current rock bottom rate, the feeling within financial markets is growing that a rate rise is inevitable – and possibly this side of Christmas.

Shop around now

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said homeowners should start locking in better deals now.

“If you’re on a variable rate deal, your rate is likely to increase with any BoE change. So, you may want to consider bagging a fixed deal before any changes kick in, and while there are some bargains around. It’s worth lining up a deal sooner rather than later, because when banks are convinced rises are on the way, fixed mortgage rates will go up before any announcement.”

The good news is that mortgage customers with less than six months to run on a fixed deal can start shopping around for a new home loan now. That’s because lenders allow you to lock in a rate up to half a year in advance.

It’s also worth exploring how much a rate rise could affect your future payments. This provides you with some breathing space to plan for how you could stretch your budget to cover a bigger monthly payment, should one be needed when your present deal finishes.

What could a rate rise look like?

We asked Hargreaves Lansdown to produce some figures reflecting how a rise in interest rates would affect typical mortgage repayments. The example tables below show two scenarios, one for a typical variable rate mortgage and the other for a fixed rate arrangement.

We’ve assumed that the present 0.1% interest rate rises to 0.25% in December 2021 and then moves upwards again, to 0.5%, in early 2022.

The figures assume a mortgage with 20 years left to run for the average London house price of £495,000.

Table 1 assumes an average variable rate mortgage of 2.32%, while table 2 shows repayments based on an average fixed rate mortgage of 1.99%.

Both rates reflect the average rates on outstanding property stock. In other words, the rates homeowners currently have, rather than the average rates available on new loans.

From the figures, monthly mortgage payments could be as much as £88 per month higher next spring.

Ms Coles said: “The gradual rate of change might lull homeowners into a false sense of security, because it might not feel like too much of a stretch to find £33 more in the monthly budget. However, the cumulative effect of rate rises can be devastating and, in a few months, if your mortgage payments are £88 higher, life could be much more difficult financially.”

Table 1: example mortgage repayments, assumed variable rate of 2.32%

Mortgage size





Current monthly mortgage payment/£





Monthly payment & increase/£ assuming 0.15 percentage point rise

2,378 (+33)

2,114 (+29)

1,585 (+21)

1,057 (+15)

Monthly payment & increase/£ assuming 0.4 percentage point rise

2,433 (+88)

2,163 (+78)

1,622 (+58)

1,081 (+39)

Table 2: example mortgage repayments, assumed fixed rate of 1.99%

Mortgage size





Current monthly mortgage payment/£





Monthly payment & increase/£ assuming 0.15 percentage point rise

2,306 (+32)

2,050 (+28)

1,538 (+22)

1,025 (+14)

Monthly payment & increase/£ assuming 0.4 percentage point rise

2,361 (+87)

2,098 (+76)

1,552 (+36)

1,035 (+24)

Source: Hargreaves Lansdown

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