What does rising inflation mean for mortgages and homeowners?

UK inflation rose to 3.8 per cent in July, up from 3.6 per cent in June, keeping the rate stuck at its highest level since January. 

The rise in Consumer Prices Index (CPI) was also higher than economists had anticipated, who had forecasted 3.7 per cent. 

The main driver behind the hike was travel. Families booking holidays during the summer term pushed air fares up by more than 30 per cent between June and July – the biggest jump since the collection of monthly data began in 2001. 

Petrol and diesel also contributed to the rise, with the average price of petrol rising by 2p per litre between June and July, while the average diesel price by 2.9p per litre over the period. 

Food and drink inflation rose to 4.9 per cent in July, from 4.5 per cent in June.

Insider heard from lending figures who explained what the increase in CPI means for mortgages and homeowners. 

How does inflation impact mortgages?

The rate of inflation affects homeowners because of its impact on the Bank of England’s (BoE) rate. 

The Bank’s target is to keep inflation at 2 per cent, and now with the rate almost doubled, the likelihood of a further interest rate cut is low. 

Analysts predict that the Bank may hold rates at their current level for the remainder of the year, meaning that those on a variable-rate mortgage are unlikely to see lower repayments for the foreseeable. 

Industry commentary 

Peter Stimson, director of mortgages at the lender MPowered, commented: “This latest jump in inflation will slam the door on the prospect of any meaningful reduction in mortgage interest rates in the coming weeks.

“Inflation is back with a vengeance and the Bank of England’s prediction that CPI will hit 4 per cent in September, which caused gasps when it was made less than a fortnight ago, now looks almost rose-tinted.

“At 3.8 per cent a year, prices are now rising at nearly double the Bank’s 2 per cent target, and this will force the Bank to rein in consumer spending by delaying any further reductions to the base rate. Hopes of another base rate cut this year now look decidedly optimistic.

“The mortgage swaps market, which tracks interest rate expectations and is used by mortgage lenders to determine the fixed interest rates they offer to borrowers, had been suggesting that the next base rate cut might come in November.

“But today’s painful jump in inflation means that base rate cut may now be pushed back into 2026, and as a result we are unlikely to see any further rate cuts from lenders in the immediate term.

“Competition between lenders is intense but mortgage rates may well have fallen as far as they can for now. They may even creep up over the next month or so as lenders recalibrate in response to rising swap rates.”

Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners echoed Stimson’s comments, saying that mortgaged homeowners may feel ‘disheartened’ by the latest inflationary reading. 

She said: “Rising inflation can dent affordability and reduce their borrowing power, making it harder to secure a mortgage or move up the property ladder. 

“Buying a home has already become more expensive since stamp duty thresholds reverted to their previous lower level in April. 

“Stamp duty has long been criticised for creating bottlenecks in the housing market, discouraging families from upsizing and older homeowners from downsizing due to the prospect of a hefty tax bill. First-time buyers face a double challenge, saving for both a deposit and a stamp duty bill. 

“Speculation this week around a fresh overhaul of property taxes may only add to the uncertainty. While reform is welcome, the idea of a new levy on sellers of homes worth over £500,000 risks distorting the market. Sellers may underprice homes to avoid the tax or inflate asking prices to offset the cost – in turn stalling transactions and skewing valuations. 

“Rising inflation also puts a spanner in the works for those hoping for mortgage rates to ease more dramatically. Persistent price pressures may cause the central bank to delay further easing. While affordability has improved for buyers in recent months, thanks to lower mortgage rates and lenders relaxing their stress test rules, rates may not be easing as fast as people hoped.  

“For existing borrowers looking to refinance, their future repayments will depend on when they secured their current deal. 

“Those emerging from short-term fixes, taken out when rates were high, could find better deals now. But borrowers nearing the end of ultra-low, five-year fixes could face a sharp jump in their monthly repayments, unless they’ve managed to clear a sizeable chunk of their outstanding balance.”