As the cost of living continues to rise in the UK, you may already be feeling the effects of inflation. From household essentials, such as your energy bills, to luxuries like holidays and new cars, inflation has the potential to affect every area of your life.
According to the Guardian, some individuals are reporting a household bills’ price increase of more than 100% between December 2021 and January 2022.
Although this sounds drastic, the rise in prices may reflect the rate of inflation; it increased to 5.4% in the 12 months to December 2021, according to Forbes, the highest it has been in 30 years.
Although your savings and investments accounts could be benefiting after seeing a decade of low interest, you could be feeling adverse effects in other areas of your finances – including, crucially, your mortgage.
How inflation could affect your mortgage repayments
In times of rising inflation, one of the tools the Bank of England (BoE) can use to bring it back under control is to raise interest rates.
By raising interest rates, the BoE attempt to encourage consumers to save their money rather than borrow. This theoretically helps to slow the rate of inflation, thereby maintaining a reasonable cost of living.
In mid-December 2021, the Bank raised the base rate from 0.1% to 0.25%. Then, at the start of February 2022, they raised the rate again to 0.5%.
While interest rates still remain at historic lows it could, nevertheless, affect your mortgage payments in the immediate future.
Read on to find out how your current mortgage could be affected by the inflation and rising interest rates, and for information on how the rising cost of living might affect your chances of securing a new mortgage in 2022.
1. If you have an existing mortgage
The BoE’s decision to raise the base rate as a means of combatting inflation may have an impact on your tracker- or variable-rate mortgage.
If you have a tracker-rate mortgage, your repayments will typically follow the base rate set by the Bank, meaning that the recent increase will result in more expensive mortgage repayments.
If you have a variable-rate mortgage, your repayments are adjusted at your lender’s discretion. If your lender does decide to increase their standard variable rate (SVR) in line with the base rate, you can expect your repayments to rise.
If you have a fixed-rate mortgage, inflation and interest rates won’t affect your mortgage repayments. However, when your fixed rate comes to an end, you may find that the cost of new deals is higher than it is now.
Interest rate rises could see your repayments increase
Here is an example of how rising interest rates could affect you.
At the beginning of December 2021, HSBC’s standard variable rate (SVR) stood at 3.54%. If the two recent interest rate increases (totalling 0.4%) were passed onto HSBC’s borrowers, those with an HSBC SVR mortgage would see this change reflected in their mortgage repayments.
Using our mortgage calculator on a £500,000 repayment mortgage over 25 years, monthly repayments would go up by £108.79.
Although this may not seem like much in the short term, interest rates are forecasted to increase further in 2022, according to the BoE.
If the HSBC SVR were to increase by a further 0.5%, for example, those monthly repayments would go up a further £139.51. This would mean an overall monthly increase of £248.30 from the original 3.54% SVR.
While this is just a hypothetical example, you could see similar increases in the monthly repayments on your tracker- or variable-rate mortgage in 2022.
What you can do about it
If you have a tracker- or variable-rate mortgage, it may be beneficial to switch to a fixed-rate mortgage to avoid the risk of having your monthly payments rise if interest rates were to go up again.
A fixed-rate mortgage sets your mortgage repayments at a certain amount for an agreed-upon period, irrespective of what happens to interest rates or the wider economy. This allows you to budget more easily and potentially have more peace of mind while interest rates are on the up.
Of course, like any mortgage agreement, there are downsides to switching to a fixed-rate mortgage. Generally, they come with “early repayment charges”, meaning you could face a charge if you pay off some or all of your mortgage within the fixed-rate period. If you need flexibility, a tracker-or variable-rate mortgage may suit you better.
If you are concerned about your tracker- or variable-rate mortgage and the impact of inflation and rising interest rates, speak to a mortgage broker at Altura today.
How we can help
If you are considering switching to a fixed-rate mortgage, an Altura mortgage broker can shop around on your behalf and give you access to lenders who may not be available directly to borrowers.
Our experienced brokers may also help you with any other concerns or questions you may have about your mortgage deal.
2. If you’re thinking of getting a new mortgage in 2022
Even if you’re no stranger to the mortgage application process, the changing economic climate means there could be aspects to securing a mortgage you have not encountered before.
According to the Telegraph, banks are beginning to reverse the relaxed affordability checks that were brought in during the pandemic to help buyers secure a mortgage.
As of January 2022, HSBC and Halifax began reviewing their affordability criteria, according to an iNews report, which claims there is a “turning tide” of mortgage availability.
These banks account for one in four mortgages in the UK, but they represent a slew of lenders who are reported to be tightening their criteria over the course of the next few months.
You could encounter more stringent affordability criteria going forward, so it is important to start planning for your mortgage application early.
Improving your chances of being approved for a mortgage in 2022
In light of the tightening of affordability criteria, it may be helpful to consider how mortgage lenders will view you in 2022.
In response to these changes, you may need to save a larger deposit than you originally intended to, especially if you were planning to stretch to your lender’s previous borrowing limit.
In addition, it may be beneficial to check your credit report, to ensure that your financial history is registered correctly, leaving yourself enough time to adjust if necessary.
Finally, as with all mortgage applications, it could be favourable to pay your credit card bills in a timely manner, and to ensure you aren’t regularly using your overdraft.
How Altura can help
If you are considering taking out a new mortgage in 2022, it may be wise to discuss this decision with one of our mortgage brokers.
We work with dozens of the UK’s lenders and can help you access a mortgage lender who may provide the deal you need based on your unique financial circumstances.
Get in touch
If you need support with your current or future mortgage, don’t hesitate to get in touch.
Email [email protected] or call us on +44 (0) 20 3411 0079.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
