Why now is the time to review your mortgage options

Today, data from the Office for National Statistics has revealed that the UK inflation rate has hit 2.5% in the year to June – the highest for nearly three years and the second consecutive month inflation has exceeded the Bank of England’s 2% target. 

If it continues to rise, high inflation has the potential to affect everything from what you can buy with your pension pot to the price of your weekly food shop. However, one of the single greatest impacts of high inflation is the change to your mortgage payments.

According to personal finance experts at money.co.uk, the recent raise means it’s never been more important to search for the best deal when comparing mortgages. 

James Andrews, senior personal finance editor at money.co.uk, said: “This is the second month in a row that inflation has risen above target and, if that trend continues, it could have a serious impact on anyone currently applying for a mortgage.

“There are two main reasons for this. The first is that rising inflation tends to go hand in hand with rising interest rates – and if the Bank of England does act to bring prices under control by raising the base rate, it’s almost certain lenders will pass this on through higher mortgage charges too.

“The second reason rising prices can affect your mortgage chances is that banks look at your bills when deciding whether to lend to you or not – and if your bills are taking up more of your wages as a result of price rises, that means you’re less likely to be offered a deal.

“While an increase in costs is frustrating for potential homeowners, the inflation rate is not something you can control. The best thing to do in times like this is focus on what you can control by ensuring you get the best deal possible – one that suits your own personal circumstances. 

“When it comes to your mortgage, you need to think about how much risk you’re prepared to take on. When it looks like rates will rise, fixed-rate deals generally become more expensive to try and take future rises into account.

“That means it might work out cheaper to take out a tracker or discount rate mortgage. Just be aware that if the Bank of England – or even your lender in some cases – decides to raise rates then your monthly bills will go up too.

“Finally, if you need lower monthly repayments, it may be possible to go for an interest-only mortgage. If you choose this, remember you will also need a plan in place to cover the balance of the loan when the deal expires.

“That’s because you don’t pay back any of the loan itself with one of these, meaning you’ll never actually own the house outright or see your debt diminish unless you switch to a repayment deal or come into enough money to clear the loan by some other path.

“Once you’ve worked out what type of mortgage deal is right for you, the crucial next step is to compare rates. 

“Don’t just do this once before making your choice – new deals are announced regularly and prices change from month to month, so make sure you monitor all of the major providers as often as you can, to make sure you don’t miss out.