Rates up, inflation down, what will happen to mortgages?

James Keable, Mortgage Services Director at Capital Private Finance looks at what will happen to mortgages as Bank of England rates go up and inflation goes down.

You will not hear this much in the press, but the recent increase of 0.25% to the Bank of England main borrowing rate announced on Thursday 11th May, had been priced in for some time.

This meant that although variable rates (trackers or SVR’s) went up, fixed rates were waiting to see what was going to happen with inflation. The Bank of England Governor Andrew Bailey also gave an indication that, depending on these inflation figures, he may look to pause any further rates cuts to wait to see the their impact of his previous actions.

As was predicted, the latest inflation figures have come down significantly. This is the result of last years’ energy rises caused in the main by the Ukraine war coming out of the calculations 12 months later. However, food related inflation is still stubbornly high, so we may still see at least one more quarter percent rise in the Bank of England rate somewhere down the track. This may mean that we do see mortgage rates edging up in the short term at least if SWAP rates react negatively.

However, one reason for potentially pausing interest rate rises is a scenario often referred to as the “hot shower” effect.

It is where you turn the temperature up, and when you don’t get instant hot water you turn it up again – only to find that you have gone too far and are scalded by boiling hot water. The same thing can happen with interest rates. If raised too far without the impact being given enough time to take effect, then you can end up with an economy slowed down too much making it very difficult to start it up again. This is particularly relevant with the delayed impact of mortgages rate increases, as many are on fixed products, which are immune from any rises until remortgage time. Therefore, the slowing impact of the higher rates being bottled up and not given time to take effect.

Economics are not a precise science, and everyone has an opinion. Mine is that we are now coming towards the end of this cycle of increasing rates, and I would welcome a period of reflection to wait for the full impact of previous actions.

There still maybe one or even two more adjustments up, but we should now continue to see inflation reduce and with this we should see then end to rate rises in the near future. This should mean that we continue to see house prices stabilise and even rise a little in the second half of the year. In fact, it might be just the right time to take a move on to the property ladder if you having been waiting to see what might happen.

If you are wondering whether now might be a good time to make your move for you, then speak to one of our experts who will be happy to explain the pro’s and con’s and the options available to you.

   James Keable
   Mortgage Services Director
   Capital Private Finance


Contact Capital Private Finance

If you are wondering whether now might be a good time to make your move for you, then speak to one of our experts who will be happy to explain the pros and cons and the options available to you.