Mortgage Rates Likely to Climb in Face of Inflationary Pressure

Managing the cost of living is an individual concern, challenging personal money managers to make the best of their financial conditions. But larger forces also play a role keeping costs in line. When economic forces threaten affordability for British families, the government intervenes, doing what it can to stabilise spending. In some cases, the Bank of England steps in, altering interest rates so that people’s money goes farther in the marketplace. With inflationary pressure on the rise, such a move is probably on the horizon, according to many financial analysts.

Rising Spending Levels May Spark a Rate Change

Inflation levels reached a five-year high in September, prompting many experts to warn of a pending interest rate adjustment in November. Until the Bank makes the move, it is all speculation, but with cost of living numbers at 3 per cent, signs point to the strong probability of a near-term rate shift.

Measured against the Consumer Price Index (CPI), cost of living increases recently rose to the highest level seen since March, 2012. Rising cost of living hits home with consumers, affecting their ability to pay for goods and services. As Britons feel the pinch, the Bank of England may raise interest rates from the current level of .25 per cent. Although such a move is intended to stabilise the overall economy, slowing the pace of growing inflation; raising rates would also have an impact on mortgages and the price of loans. Funding would still be made available from various lenders, including no-credit-check alternatives, but the price of repayment could climb for mortgages and other loans.

The Bank of England consistently strives to keep cost of living below the 2 per cent threshold, so its governor was some explaining to do, following the recently released numbers showing a climb to 3 per cent in September. With a rate hike, consumers can expect steeper mortgage and loan interest payments, but there is an upside to bumping rates. Savings rates can be expected to rise alongside higher loan repayments, creating a bright spot for savers trying to get the best possible return on their cash investments.

It is thought the double blow from rising costs and stagnant household earnings have reached a crisis level for consumers fighting to maintain their standard of living. According to a Scottish Friendly representative, “the wolves are now at the door,” making it absolutely necessary to make moves strengthening the pound.

Anticipating the rate bump, home owners are advised to lock-down the lowest possible mortgage deals soon, before hikes take effect. Though savers will benefit, mortgage holders currently in base rate tracker mortgages and other variable rate financing could face steep increases, if personal adjustments are not made before rates rise. In other words, the window may be closing for those in search of more competitive mortgage deals.

According to recent research conducted by the group, Which?, one in twenty borrowers on variable rate mortgages reported an interest rate hike would make it hard for them to meet their financial responsibilities with a higher mortgage payment obligation. An even higher percentage indicated their lives would be affected in some way by such a move.

Although many home owners have shifted away from variable rate deals, favouring better terms available on recent fixed rate opportunities, a substantial number of borrowers are still bound to variable mortgages. A rate hike of .25 percent could push individual monthly payments upward by 20-30 pounds, under some scenarios. Shedding variable rate loans could help protect mortgage holders from the pending increases, locking-in more affordable alternatives. Nearly four million variable mortgages are outstanding across the UK.

While savers have hoped for a rate increase to boost investment returns, low rates have meant cheap mortgage deals for home owners during recent years. Even variable and base rate tracking loans have done well, but it is feared a Bank move to bump rates will result in higher payments for many. The policy meeting in November will provide the final word on an increase, but with so many factors pointing to an upward adjustment, locking-in to a low fixed rate may be the best approach for home owners able to secure favourable terms.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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