Rising inflation rate poses ‘fresh challenge for mortgages’

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Consumer Price Inflation (CPI) rates have risen once again in the year to February with rising food prices and energy bills continuing to drive the upward trend. High inflation consequently has an adverse impact on purchasing power, and while mortgage rates have been edging lower since last October’s high, the new figures may pose a “fresh” challenge, an expert has warned.

The Consumer Prices Index (CPI) rose by 10.4 percent in the 12 months to February 2023, up from 10.1 percent in January.

While prices are expected to drop rapidly later this year, inflation is still more than five times higher than the Bank of England’s target of two percent.

Commenting on the news, Alice Haine, personal finance analyst at Bestinvest, said: “Rising inflation delivers a fresh blow to households that were hoping the financial squeeze was finally starting to ease.

“It means disposable incomes are still very much under threat when you consider the additional challenges posed by higher mortgage costs, falling real incomes, looming tax rises and the prospect that the Bank of England may hike interest rates for the eleventh time in a row tomorrow.”

Ms Haine continued: “Higher inflation will pose a fresh challenge for mortgages and the wider property market, as it dents purchasing power – something lenders carefully consider when evaluating a borrower’s suitability for a mortgage.

“Add in significantly higher interest rates than a year ago – and the potential of further rate increases to come – and first-time buyers and those looking to remortgage will find they can afford less house for their money.”

Mortgage rates have been gradually falling since their peak in October following Liz Truss’ Government’s disastrous mini-budget. This offered some hope for households still contending with higher living costs.

However, Ms Haine continued: “Affordability will come under the spotlight again tomorrow if the Bank of England pushes ahead with a 25-basis point interest rate hike to curb sticky inflation once and for all. However, a pause in the rate hiking cycle may allow mortgage lenders to start reducing fixed rate deals once again – partly because swap rates, which banks use to price fixed-rate products, are still trending lower.”

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But with mortgage approvals slumping in January as buyer demand eased in the face of higher borrowing costs, Ms Haine said falling real wages and persistently high inflation means the property market “needs all the support it can get” to avoid a “dramatic” downturn.

Craig Fish, managing director at London-based mortgage broker Lodestone said: “The Monetary Policy Committee now faces a very difficult decision. There was a wide expectation that rates may well have been kept on hold this week, but I now fear that this may not be the case and we will see a 0.25 percent increase.

“I do hope, however, that they consider the fact that this slight jump has mainly been caused by food supply costs and that a further increase in Base Rate will hurt the economy as a whole. I do not see this having an immediate impact on borrowers, however, as we are seeing lenders’ rates fall in general.

“The only people who will be affected directly will be those on a tracker mortgage if the base rate is increased.”

Graham Cox, founder of the Bristol-based broker, SelfEmployedMortgageHub.com added: “The unexpected jump in February’s inflation figure is the last thing the Bank of England needs.

“Fearful of placing further pressure on bond prices, it was widely expected the central bank would leave the Base Rate unchanged at four percent when it meets tomorrow. With inflation proving stickier than many commentators thought, all bets are off again.”

The Office for Budget Responsibility expects inflation to fall to 2.9 percent by the end of the year, and with wage growth easing in January and energy bills saved from a 20 percent hike in April thanks to the extension to the energy price guarantee, Ms Haine said the road ahead appears “brighter”.

But a rise in inflation coupled with the recent turmoil in the banking sector is raising a fresh set of challenges for the Bank of England, which must now decide whether to push ahead with a widely expected 25 basis point rate hike or put their monetary tightening plans on pause until the banking turbulence passes.

Ms Haine said: “If the decision is to pause, this could mean inflation stays high for longer as workers benefit from end-of-tax year pay rises and, for the lucky ones, bonuses too.

The reality is that average household costs are, on average, 10.4 percent more expensive than they were a year ago and while everyone’s inflation number will be slightly different to the headline figure generated by the ONS.

Ms Haine added: “The message is clear. People still need to spend very carefully to ensure they continue to live within their means and don’t take on expensive debt.”

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