What could the rise in inflation mean for your mortgage?

A surprise rise in inflation in the year to December could have an impact on mortgage rates, so if you’ve found a competitive deal you like, you may want to secure it now if you can.

Inflation rose to 4% in the year to December, up from 3.9% in November, despite predictions from economists that it would ease to 3.8%. Prices were pushed higher due to increases in the cost of alcohol and tobacco, according to the Office for National Statistics (ONS), although the rate of increase in the cost of food and non-alcoholic drinks fell.

The unexpected increase makes it less likely that we’ll see the Bank of England cut interest rates imminently, especially as wage growth remains strong. That’s because when inflation is high, interest rates tend to remain higher too. That makes borrowing more expensive, which in turn dampens consumer spending and helps keep prices down.

Swap rates, which are the rates that lenders must pay other financial institutions to acquire fixed funding for a set term, went up immediately following the inflation announcement, although it’s too early to tell whether this increase will be reflected in mortgage rates. Most commentators believe that we won’t see a cut on 1st February , which is when the Bank of England’s Monetary Policy Committee next meets, although some believe that a potential rate cut in May could still be on the cards.

The good news is that several lenders have reduced their mortgage rates substantially this year as they battle to attract customers, with some launching five-year fixed rate deals below 4%. However, following the unexpected inflation increase, the best deals could be at risk, so if your mortgage deal is coming to an end soon it makes sense to take advantage of competitive rates while they are available.

You can usually secure your next mortgage deal up to six months before you need it to begin, which means if rates do rise, you’ll have peace of mind that you’ve got the rate you wanted. If, however, mortgage rates come down before your next deal starts, you can then review things again and switch to a cheaper deal if one becomes available.