What rising inflation means for mortgages, savings and investments
Inflation rose by 2.2pc in July, according to the Office for National Statistics. The increase from 2pc in June means price growth has climbed again after two months at the Bank of England’s target of 2pc.
The increase was smaller than the 2.3pc rise economists had expected, largely due to a fall in hotel prices.
This will raise hopes that the Bank of England will reduce its Bank Rate again later this year, and with it the cost of borrowing. The central bank finally cut the Rate in August for the first time in four years, down from 5.25pc to 5pc.
The market anticipates one or two more rate cuts before the end of the year – meaning the Bank Rate could drop to 4.5pc.
This could have a significant impact on your finances – including savings, mortgages and investments. Here, Telegraph Money explains what your options are.
What is inflation?
Inflation is the term used by economists and governments to describe the speed at which prices are rising.
In Britain, we usually measure inflation by comparing the price of a particular item to its price at the same time the previous year.
For example, if a chocolate bar costs £1 in April 2023 and then in April 2024 it costs £1.04, its price has risen by 4pc and thus inflation for this particular item stands at 4pc.
However, statisticians have to calculate the pace of price rises across the whole of the economy and use a variety of methods to estimate this as accurately as possible.
The most closely followed of these methods used by the Government and the Bank of England (BoE) is the Consumer Price Index, often abbreviated to CPI, which is published each month by the Office for National Statistics (ONS).
This calculates inflation based on a typical basket of goods and services which statisticians at the ONS update every year.
What does the latest inflation figure mean for your mortgage?
Mortgage rates have remained high over the past two years, adding financial pressure across the housing market.
For first-time buyers, higher rates of borrowing have made it harder to get on the housing ladder, while existing homeowners face a mortgage shock when coming off ultra-low fixed rate deals and on to new loans at today’s rates.
The average two-year fixed rate mortgage is currently 5.67pc, according to analyst Moneyfacts.
Fixed-rate and variable-rate mortgages are linked to the Bank Rate, although not necessarily directly.
Some tracker mortgages are linked to the Rate, often sitting one or two percentage points above it, while fixed rate mortgages are priced based on swap rates – market expectations of where the Bank Rate will be at a certain point in the future.
Despite the slight inflation rise, it’s expected that the Bank Rate – and mortgages – will continue on the current downward trajectory.
David Hollingworth, Associate Director at L&C Mortgages said: “The direction of travel is unlikely to be disturbed by reaction to today’s news and the market will have been well prepared for an [inflation] increase.
“Instead, we’re likely to see continued and frequent movements in mortgage rates, as lenders continue to adjust and improve where they can.”
If you’re due to remortgage soon, our mortgage cost calculator can tell you how a new deal will affect your monthly bills.
What can you do if you need to get a mortgage?
For homeowners coming to the end of their fixed-rate mortgage it is important to remember you can start reviewing your options three to six months in advance and lock into a deal without committing to it. If rates then go up before you need to finalise your loan you are safe, but if rates fall in the interim you can choose a better rate.
“Assess your financial situation, check your credit score, and compare the current mortgage rate,” said Mr Mendes.
“Consulting a mortgage broker can provide valuable guidance tailored to your specific need, such as whether to switch to a new fixed rate, opt for a variable rate or remortgage with a different lender.”
For those buying for the first time, now would be a good time to get everything ready for a mortgage application said Alice Haine, personal finance analyst at Bestinvest: “Homeowners and first-time buyers hoping for a second rate cut sooner rather than later may be disheartened by the latest inflation reading, as it reduces the likelihood of a September reduction.
“Comfortingly, while mortgage rates remain high some major lenders have already rolled out cuts with the number of sub 4pc home loans on the rise – offering glimmers of better times ahead. This may deliver the reassurance nervous buyers need to push ahead with a move whether to purchase a first home or upsize to a larger property.”
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What are the best deals on the market?
For first-time buyers looking to borrow up to 90pc of the house price, the best deals on the market include Progressive Building Society’s two-year fixed rate at 5.1pc with a £995 product fee and NatWest’s five-year fixed rate at 4.68pc with a product fee of £995.
For those with 25pc equity looking to remortgage NatWest’s two-year fixed rate at 4.29pc with a product fee of £1,495. If you have 25pc equity and are looking to fix for five years The co-operative Bank has a deal at 4.01pc with a product fee of £999.
If you are remortgaging or buying for the first time with 40pc equity, NatWest is offering a two-year fixed rate of 4.29pc with a £1,495 product fee. If you are looking to fix for five years with 40pc equity, Barclays has a 4.01pc rate deal with a £999 product fee.
What does falling inflation mean for your savings?
Lower inflation brings both good and bad news for savers. With inflation at 2.2pc it is very easy to beat it with the current rates on the market.
The average easy access savings rate is currently 3.11pc, according to Moneyfacts, but the most competitive accounts still pay over 5pc.
This is a positive, since inflationary price rises eat into the value of savings – put simply, if your savings aren’t matching or exceeding inflation, the rising prices mean your money won’t be able to buy as much as it previously could. Our inflation calculator can show you how much your savings are being eroded by price increases.
However, savings rates are unlikely to stay this high for long. Much like mortgages, savings rates tend to rise and fall with the Bank Rate – and providers have already started to reduce rates following the Rate cut, and in anticipation of further cuts to come later this year.
What can you do about it?
As a minimum, you should check your current rates and make sure you’re beating the inflation rate.
Planning ahead, it might be a good time to commit to a fixed-term account if there’s cash you won’t need to access for at least a year.
“It is crucial savers keep on top of the changing market and make the switch to ensure they are not getting a raw deal, especially as we have seen some of the top rate deals drop below 5pc,” says Caitlyn Eastell of Moneyfacts. “It would not be too surprising to see more providers adjusting their rates in reaction.
“Since the previous inflation announcement, fixed rates have faced further reductions, so it may be wise for savers to begin considering locking into an interest rate while the majority continue to pay competitive returns. Longer-term rates have suffered the most, seeing drops as large as 0.31pc for a five-year term month-on-month.
“For now, top-rate variable accounts have seen little volatility since the previous inflation announcement, but it remains to be seen how long this lasts.”
What’s the best deal on the market?
For easy access accounts, Cahoot Sunny Day Saver is offering 5.2pc, with no minimum deposit, according to Moneyfacts, up to £3,000. Interest is paid annually on the account’s anniversary. Chase pays 5.1pc, with no minimum deposit on balances up to £1,000,000.
For a fixed account, Union Bank of India pays 5.25pc for a one year bond with a minimum deposit of £5,000.
Longer-term bond rates, which usually pay more, currently have lower rates – but could still be worth considering if rates start to fall more widely later this year. You can get 4.55pc from Al Rayan Bank via Raisin UK for a five-year fix.
What does it mean for your pensions and investments?
The stock market is not officially linked to inflation or the Bank Rate, but as both are significant indicators of the state of the economy, they can have a big impact on investor sentiment.
Craig Rickman, personal finance and pensions expert at Interactive Investor, says: “With inflation expected to continue to creep up over the coming months, savers and investors would be wise to bear this in mind when making decisions with their money.
“If left unchecked, price rises can have a punishing impact on your financial future, silently eroding the ‘real value’ of your portfolio and reducing its future buying power. That’s why it’s essential to make sure your savings and investments aim to beat inflation.
“Hunting for the best cash savings rates, making the most of your tax wrappers such as Sipps and Isas, and keeping your portfolio costs low are three savvy ways to mitigate the impact of price rises on your wealth.”
Inflation may impact retirees, or those who are due to retire soon, due to its impact on bonds. Pension “lifestyling” strategies tend to move towards less risky investments as you reach retirement, in order to shield your money from market fluctuations – often, this means increasing your proportion of bonds.
Bonds become more attractive in periods of rising inflation as the value of the income in real terms is increased. This is good news for those who already hold bonds, but more expensive for those who are yet to buy.