[Closed] inflation & mortgage rates

Variable rate mortgages are linked to the Bank of England's base rate for interest not directly to inflation, currently at 0.5%. The bank's rate is usually around 3-5% above this.

They are not tied to inflation. However the BoE may raise interest rates in an effort to kerb inflation.

Well...inflation is not the key here it's the Bank of England base rate. That's been at 0.5% for close to 2 years now. A variable mortgage is usually around 1% over BoE BR but in recent times that rate has been kept lower than it would normally be so most variable mortgages are more like 2 or more % over BoE BR. So yes you are worse off than if you'd been on a variable rate - indeed even if the BoE BR had been set at a more usual level.

the inflation rate is irrelivant really, it's the Bank of England base rate you should look at, and how much above that rate the banks have their SVR.

House price inflation is well below the RPI anyway.

5.9% isn't really that bad. I fixed in on 5.75 a few years ago when the base rate was 4.5%. Fix rate mortgages now don't offer much better than that.

variable rate mortgauges are typically linked (either directly or indirectly) to the bank of england base rate. At the moment that is 0.5%. In a normal environment, when inflation rises (the target is 2%), the bank of england rases the interest rate to counteract the inflation (if credit costs people money, they buy less, and inflation drops).

However, at the moment the BOE is keeping rates low. There are a bunch of reasons for this

country is close to recession, keeping rates down helps avoid this
inflation is being 'imported' - that is a lot of it is fuel, taxation etc. Raising rates won't help this
high rates will lead to more of a squeeze on unemployed people who are struggling with mortgauge payments

So, right now, you're worse off. If the BoE raises their rates, the point at which you're better off will depend on what variable rate was available. 5 years ago you could get BoE - 0.5 % - so the BOE rate would have to get to 6.5% before you're in the lead. however in the last couple of years the best rates are around boe rate + 3% - so once the boe rate gets to 3% you'll be better off.

When this happens is another matter. Unlikely to be this year, could be next year, might not happen for 5 years..

The thing with a fixed rate is its not about getting a 'better' rate, its about insurance. I fixed at 5.09% 2 years ago. My alternative (i had no equity at the time) was a 4% variable. I figured the additional cost of the fix in the short term (£150 a month) was worth the cost as I figure the chance of the boe rates being over 3% in 3 years time was quite high. Looks like my estimate was wrong, however taking the fix was, in hindsight, still the right thing to do (if not financially the best decision)

the other way to look at things is with inflation at 5.5%, you're only being charged 0.4% per annum in real terms for the mortgauge. That's cheap!

Anyway ,usually you're worse off by taking a fixed rate mortgage. Occassionally it works out really well - such as those that fixed before rates went up to 15% a couple of decades ago.

rates went up to 15% a couple of decades ago

What when the torries were last in power?

I think you maybe confusing 'interest' rates with 'inflation' rates.

Your mortgage has an interest rate of 5.9% meaning you will pay back that much extra on the value you borrowed.

Inflation is the rate that things are getting more expensive, so your average weekly spend this week will cost you 4.4% more than last year.

In regards to your mortgage high inflation could be viewed as a good thing as the amount you owe is effective 'fixed' in time and today a £ is worth less than a £ you borrowed when you took out your mortgage, so relatively you are better off.

This however is a very simplistic explanation as you have compound interest on your mortgage and there are several different measures of inflation and assumes that pay-rises keep pace with (or exceeds) the rate of inflation.

If at all uncertain, overpay on your mortgage as compound interest is a killer.

DAVE

Can't usually overpay on a fixed mortgage, I'd never have one as prefer to take the risk and save money.

Can't usually overpay on a fixed mortgage

I can and I am at the moment

To be honest, when I got it 5.9% was a very good deal!! as most were up at 6 or 7%, little did I know of the impending financial doom the country was going to be in a year later!

I came off my fixed rate 5.69% last year and it dropped onto the SVR of 4.29%; I've carried on paying the same amounty i.e. making overpayments.

I'm still on the SVR and I don't really have the equity to get a great deal.

I'm now wondering what the interest rates would have to rise to before its worth me coming off the SVR and getting a new deal

Its a minefield out there!

normally there's a limit on overpaying any mortgauge, whether fixed or variable. In my experiance (fairly limited) its around 10% of the remaining amount owed - which in year 1 of a 25 year mortgauge would be approx triple the regular payment - so its not particularly restrictive.

I'm not convinced by the opinion that a fixed rate is normally more expensive. Fixes are normally based around the libor rate over the period the money is being lent for, plus a cut for the bank. Variable rates are normally close to the 3 month libor rate, plus a cut for the bank. Neither is more beneficial for the bank, or less beneficial for you

the better fix rates are already disappearing as the money markets are pricing in the bank rate rising slowly over the next couple of years. if you're on a high variable rate (above say 3 or 4%) I'd personally be looking to fix at the moment

Your mortgage has an interest rate of 5.9% meaning you will pay back that much extra on the value you borrowed.

For every year you have your mortgage.

My mortgage amount - circa £200k. Total repayment? More like £430k.

For every year you have your mortgage.

My mortgage amount - circa £200k. Total repayment? More like £430k

you sure about that? you'd need an interest rate over 7% to have to pay that much extra. at 5% the total repayment is around £350k. Still sounds like a lot, but if inflation averaged 3% over the next 25 years, 350k is 'only' 167k in real terms at the end of the loan (if you work the cost out as you pay it off, the 'real' cost would be around £254k at a 5% interest rate).

This site is good to play with - http://www.bankrate.com/calculators/mortgages/mortgage-calculator-tool.aspx

It's all about Loan To Value these days if you want a good deal.

I'm not convinced by the opinion that a fixed rate is normally more expensive

Well it certainly would have worked more expensive for me since I bought my 1st house in 1996. But anyway, whenever I see fixed rates they're noticeably higher than variable.

For every year you have your mortgage.

My mortgage amount - circa £200k. Total repayment? More like £430k

you sure about that? you'd need an interest rate over 7% to have to pay that much extra. at 5% the total repayment is around £350k. Still sounds like a lot, but if inflation averaged 3% over the next 25 years, 350k is 'only' 167k in real terms at the end of the loan (if you work the cost out as you pay it off, the 'real' cost would be around £254k at a 5% interest rate).

This site is good to play with - http://www.bankrate.com/calculators/mortgages/mortgage-calculator-tool.aspx
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Our rate is currently about 5.7% (I think we're the only people in the country whose rate went UP when the fixed term ended! :sob:). Can't remember the exact figure but I'm fairly sure it's a good chunk over £400k.

the other way to look at things is with inflation at 5.5%, you're only being charged 0.4% per annum in real terms for the mortgauge. That's cheap!

Though we need to relate this back to (1) the fixed asset being financed and (2) the means by which the mortgage is paid.

House prices aren't inflating at the same rate, and so that influences this net cost of the mortgage.

Incomes are definitely not inflating at this rate, and so the same issues arises.

When it comes to financing these things, I tend to take a very shoprt term view: what can I afford to pay today vs how much money I am owed. It's just cashflow for me.

Inflation can be a leading indicator of the way one would expect to see base rates move.

Also, expectations of inflation will tend to push 1 to 3 year rates up because the expectation is that base rates will have to rise and stay up in the short to medium term to bring inflation back under control. This then means that fixed rate mortgages will increase because interest rate swaps will increase.