Why the surprise inflation rise is bad news for your mortgage
The rate of consumer price inflation was 3.6 per cent for the year to June, a surprise increase from 3.4 per cent for the year to May. Many economists had expected it to remain unchanged.
The rise, which was mostly driven by an increase in petrol prices, takes inflation further away from the Bank of England's 2 per cent target. The Bank expects it to eventually fall to 2 per cent by 2027.
The figures have cast doubts over how much further and how quickly the Bank will cut its base rate of interest, which is now 4.25 per cent having been cut four times since it hit a 15-year high of 5.25 per cent in August 2023.
The Bank had been expected to cut the base rate by 0.25 percentage points when its monetary policy committee meets next month, but this may now not play out as predicted.
This matters for mortgage holders because fixed rates are priced based on swap rates — the interest rates at which banks lend to each other, which are based on market expectations of future Bank rates.
Dan Coatsworth from the investment platform AJ Bell said markets have put the chance of a rate cut in August at about 82 per cent. 'But there is a lot less confidence in future cuts. The latest inflation figures might encourage the Bank to sit on its hands and wait for more data to see if the spike in the cost of living is only temporary,' he said.
Fixed mortgage rates had been falling over the past few weeks, which has been good news for buyers as well as the hundreds of thousands of homeowners whose deals are due to end this year.
The lowest two-year fixed rate has fallen from 3.98 per cent on June 15 to 3.79 per cent today for someone buying a home. The deal, from Santander, has a £999 fee and is available at up to 60 per cent loan-to-value (LTV). The lowest rate for someone remortgaging is 3.83 per cent from HSBC with the same fee and maximum LTV.
David Hollingworth from the mortgage broker L&C said: 'Mortgage rates have been reflecting the market's confidence in more cuts to come. Lenders have been locked in an attritional rate battle that has seen frequent, albeit small, reductions to fixed rates.'
The lowest five-year fixed rate has fallen from 3.99 per cent in June to 3.86 per cent from HSBC, available with a £999 fee for someone remortgaging at up to 60 per cent LTV.
Hollingworth said: 'Today's news could take a bit of momentum out of those reductions, although it may not be enough to spark a significant reversal.'
• Mortgage rule changes could help 16,000 first-time buyers a year
Higher inflation is usually bad for savers because it eats into the real value of their returns. However, there is a silver lining because it usually keeps interest rates higher, meaning that they can lock into a better deal.
Now that the market doesn't expect rates to fall as quickly, the top-paying accounts may stick around for a little longer. although you will still need to move fast because the best deals are often from smaller banks that fill their cash quotas quickly.
The highest one-year fixed savings rate is 4.58 per cent from GB Bank, while the top two-year rate is 4.44 per cent from DF Capital, which also has the highest five-year rate of 4.47 per cent. All three accounts require a minimum deposit of £1,000.
The best interest rate on an easy-access accounts, where rates can usually be cut at short notice, is 5 per cent for a year from JP Morgan's digital bank Chase. It's a variable rate with a 2.25 percentage point bonus for the first 12 months, and you need to have a current account with the bank.
Atom, another app-based bank, pays 4.75 per cent variable if you do not make a withdrawal — if you do, the rate drops to 2.5 per cent.
Caitlyn Eastell from the data company Moneyfacts said: 'People should act quickly to avoid inflation eroding their hard-earned wealth by moving their money to the most competitive accounts. Savers earning less than the level of inflation should shop around for better returns immediately.'
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