What Impact Could The Latest Rise In Inflation Have On Mortgages?

UK inflation rose steeper than expected in October to 2.3%*, up from 1.7%* the previous month. This unexpected rise took inflation back above the 2%** target set by the Government and to its highest level for six months, but it is still well below its most recent peak of 11.1%* in October 2022. 

Was this just a bump in the road? Or is it an indicator of more testing times ahead? And what could all this mean for mortgage holders? 

*Source: Office For National Statistics (ONS) / **Source: Bank Of England

Why did inflation rise so sharply in October?

Over the last few years, inflation has proved to be a much more volatile beast and difficult to contain—not just in the UK but across the globe—and the extent of this latest rise surprised many market experts. 

However, there were some clear signs that this sudden jump could happen, not least of which was the rise in energy prices, particularly electricity and gas, following the 10%* adjustment of the energy price cap in October. 

*Source: Ofgem

The Labour Government’s first Autumn Budget Statement could also have been a factor (Budgets have often caused ripples in the inflation data that follows them). It’s uncertain how the measures announced in the Budget could play out, particularly the large increase (£26 billion*) in employer’s national insurance contributions and how this might be passed onto the wider economy. 

*Source: Chartered Institute Of Taxation

How does rising inflation affect mortgage rates?

When inflation increases, the Bank of England, like all other central banks, will often raise its base rate to curb price growth by making borrowing more expensive—including mortgage rates—and encouraging saving. 

At its last committee meeting on the 7th of November, the Bank Of England chose to reduce its base rate for just the second time this year by 0.25% from 5% to 4.75%. Following this meeting, the Bank’s governor, Andrew Bailey, suggested that future rate cuts would be much more gradual than they had been in the past. 

Despite these words of caution, the rate cut was very welcome news for millions of mortgage holders in the UK, who’ve had a rough ride with their repayments over the last few years during a cycle of rising interest rates following the COVID-19 pandemic.  

There’s no indication that the Bank’s cautious strategy will change in light of the latest inflation figures. However, if the inflation rate keeps climbing, it could eventually result in a rise in the base rate to bring it back under control. 

This would then immediately impact repayments for variable-rate mortgages, such as tracker mortgages, and also mean the cost of borrowing will increase for anyone looking to buy a property or remortgage.

Could rising inflation spark a return to rising interest rates in 2025?

It’s worth remembering that, despite its recent jump, the current inflation rate is a long way from its most recent high of 11.1% two years ago. Since then, both the previous and current UK governments have made keeping inflation low one of their key economic goals. 

Inflation hasn’t stayed below the 2% target rate for longer than two months in 2024. Rather than looking to raise its base rate to keep inflation below this level, it could simply mean that the Bank Of England will revise how often and when it looks to make any further cuts during 2025. 

What should homeowners and homebuyers do?

If you're an existing homeowner looking to remortgage or move home in the next twelve months and worried about the possible impact of rising inflation on mortgage rates, you can talk to us! Our Mortgage Experts can offer guidance and advice if you’re concerned about what options you’ll have available. 

Just make an enquiry, and a member of our mortgage team will be in touch.