What inflation rises could mean for mortgage rates

Harry Arnold - Anderson Harris

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Published: 8th September 2021

This Article was Written by: Harry Arnold


Recent reports suggest UK inflation is on the rise. Here we discuss the implications for mortgage rates and the residential property market.

Consumer price inflation hit a two-year high of 2.1% in the year to May 2021, exceeding the Bank of England’s 2% target. The Bank’s outgoing Chief Economist – Andy Haldane – warned that inflation could be a bigger problem than the transitory view held by many of his colleagues. He indicated inflation could reach 4% this year.

At the same time, in the US, The President and some Economic commentators are at pains to reassure that some modest inflation is not such a bad thing.

Fluctuations in fixed rates

Back in the UK, long-term fixed rates for low Loan to Value mortgages (LTVs) are at the lowest they have been in history (0.99% for 5 years for a 60% loan to value product with a £995 bank product fee).

As a result of the pandemic and lenders’ cautiousness, high LTV mortgage rates are high bearing in mind the 0.10% Bank of England base rate compared to early 2019 when base rate was at 0.75%.

Looking ahead, it is possible that the base-rate could rise. In doing so, low LTV mortgages (60%) will most likely rise but high LTV mortgages may not rise as quickly as we feel there is still significant margin for lenders to cut in to at these levels if they want to keep market share. These rates increased significantly post lockdown (even though bank of England base rate reduced to 0.10%) and only now is the cheapest deal for a 90% 2 year fixed rate at 1.97% with a £999 product fee. It is worth noting that the cheapest 5 year Fixed rate at 90% LTV is circa 2.65% with a £999 fee. This rate is significantly higher compared to the 60% LTV 5 year fixed rates that are available at 0.99%.

High LTV lending is being driven by risk adjusted returns and not by the actual cost of funds. With this in mind, the state of the economy and future lockdowns are perhaps a far better barometer of where the overall rate environment could look like in the coming 2 years for mortgages (when compared to the Bank of England base rate).

If the UK does experience future lockdowns, few will be worrying about inflation. Given the rising covid cases and talk in recent papers around possible October “firebreak” lockdowns, the inflation concern may in fact dissipate as the country navigates the “bumpy” winter ahead.

Different appetites for inflation

Other governments around the world appear to be willing to stomach higher inflation over the medium term. The Federal Reserve Bank and the European Central Bank are just two examples. Even the Bank of England may soften due to its huge indebtedness to the Government. The Bank now holds over £900bn in Government bonds from lending money to the Treasury hand over fist at the height of the crisis.

The state of the housing market

The housing market continues to remain solid, but a lack of stock is causing many transactions to take longer than usual. Some properties are proving less popular (and harder to shift), given the multiple periods buyers have spent in lockdown over the past 18 months. For example, flats without gardens remain undesirable.

The recent Stamp Duty holiday may have helped to inflate prices in the short term and there may be some areas where values may be a bit softer. Saying that, the strong demand for certain properties combined with the lack of available stock could continue to drive up prices in some areas.

This is particularly the case where the property values are £1m+ and where the £15k saving on stamp duty has less of an impact. As an example, high value houses in the country are still in high demand and demand is outstripping supply.

Interestingly our buying agent friends in London are telling us that they are busier now than they were during the stamp duty holiday frenzy, which reveals continued confidence and buyer appetite in the Capital.


For those able to afford low loan to value mortgages, the impact of inflation rises may not be as severe as people fear. The prices of high value stock in desirable locations are, however, likely to rise.

At the lower end of the market, prices may cool off given the removal of the Stamp Duty holiday. Sellers may refuse to accept less and buyers, now faced with stamp duty, could be more frugal. High low to value mortgages may still take a time to the get to their pre-pandemic levels.

As always, it will be important for buyers to find the right mortgage product to both fund their purchase but also be sustainable for them with future inflation movements. Independent professional advice will help to determine the best product for them, not just now but also affordably over the long-term.

Contact our team of specialists on tel. 020 7495 6633 or email enquiries@andersonharris.co.uk.

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