A rise in Ofgem’s energy price cap was the main driver of the increase in the Consumer Price Index (CPI) in July after it fell to 2.6% the previous month.
With inflation moving away from the 2% target, it would seem that the Bank of England’s most likely course of action is to raise the cost of borrowing.
The last time the bank’s policymakers met, three out of nine wanted to raise interest rates to 4%.
Does today’s inflation data mean they will take action at the next meeting on September 17? What does this mean for your mortgage?
What is the impact on mortgages?
The general feeling among mortgage experts is that today’s inflation number was expected, and therefore lenders were already reacting to this scenario when they raised fixed interest rates several weeks ago.
Ben Thompson, director of home relocation strategy at Mortgage Advisors, said: “After last month’s surprise drop, inflation was always likely to bounce back.
“Fuel prices have risen again since the last reading, so today’s rise doesn’t really tell us anything we didn’t expect.
“What actually matters is what this does to the Bank of England’s next move, because that is what changes the situation Mortgage deals available.”
In fact, he explained, lenders don’t price fixed deals against today’s rate — they price them against where they expect prices to go next.
“That’s why inflation data can affect what’s available before the bank does anything at all,” he added.
What to do if you are remortgaging or buying a home?
The message to anyone set to renew their mortgage deal is to act soon and not wait, Thompson said. “If your current deal expires in the next few months, lenders will typically start re-pricing in the run-up to the bank’s decision, not after,” he said.
“So, waiting to see what happens when the next base rate announcement in September could mean missing out on deals that were only previously available.”
The same applies to those who move home. Thompson’s advice is that none of this should change your plans. He suggested checking your numbers against a slightly higher rate so that the shift in borrowing doesn’t catch you off guard.
His guidance was echoed in the letter sent by L&C Mortgages as well. Its associate director, David Hollingsworth, said the rise in inflation was broadly in line with market expectations, which was important from a mortgage borrower’s perspective.
“Financial markets are already taking into account the threat that interest rates will have to rise to combat high inflation,” he said.
Predict “yo-yo” mortgage rates.
He added: “However, there remains a volatile backdrop and it is impossible to rule out further volatility in mortgage interest rates at this stage.
“The good news is that because today’s increase in inflation was widely expected, it is unlikely that there will be major market spillovers that would put further pressure on lenders’ funding costs in the short term.
“For anyone considering buying or remortgaging, getting advice early remains important. Mortgage rates continue to change frequently, and the uncertain economic landscape will continue to dictate lenders’ moves over the coming weeks.”
