Rising inflation is generally not a good thing for anybody; least of all, mortgage holders. The Bank of England, the body responsible for determining these percentages, will take inflation into account, when deciding whether to increase or decrease the Bank Rate, which currently stands at 2.25%. It is important to note that, for various reasons, usually interest rates will, in general, be higher than the Bank Rate by several percentage points.
This is because lenders need to account for risk; and the greater the risk, the higher the interest rate; this is particularly pertinent for those borrowing a large amount, relative to their deposit. Offering a mortgage also entails certain administrative costs for the lender, such as staff salaries, in addition to numerous overhead overheads, that need to be covered by the interest margin.
However, inflation has been accelerated by the plummeting value of the pound, – triggered by Kwasi Kwarteng’s controversial mini-budget, amongst other factors. The pound slump has entailed some devastating implications on interest rates, which in turn is negatively impacting house prices throughout the country.
Indeed, this is something that has featured prominently in news headlines this week. Prospective homeowners will also naturally be disconcerted by the fact that this is the first time in fourteen years, rather alarmingly, that the average interest rate on a two-year fixed-rate mortgage has exceeded 6%. as it stands currently, the average rate on these types of deals is 6.16%; figures which have not been seen since the zenith of the 2008 credit crunch. Moreover, the typical rate for a five-year fixed-rate deal is now 6.02%, a level which has not been seen since February 2010.
Therefore, the reason the Bank of England raises interest rates is to alleviate inflation by suppressing demand, which ultimately has the knock-on effect of reducing prices.
When exactly prices can be expected to fall, however, is anybody’s guess. Whatever the case, it certainly does not look like it will be happening anytime soon.