Mortgage warning issued as UK set to be hit with inflation rise in 2022

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Last week, the Bank of England announced that it expects inflation to peak at four percent in 2021.

This represents a 10-year high and is a sharp rise from the bank’s previous prediction of 2.5 percent in its last forecast.

On top of this, the Bank of England confirmed it has decided to keep its base rate at a record low of 0.1 percent.

This value has remained the same since March 2020 and can be viewed as bad news to financial bodies and high street lenders.

The base rate is the Bank of England’s official borrowing rate, which can affect how much savers can earn and borrowers can pay out.

If someone is on a variable or tracker mortgage, where anything they pay is directly linked to the base rate, rate rises mean their mortgage becomes more expensive.

However if someone is on a fixed mortgage, any inflation changes will not impact their payments

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Inflation: Mortgages

Inflation: Mortgage warning issued as UK set to be hit with inflation rise in 2022 (Image: GETTY)

Experts are warning that the base rate will not remain steady forever and that homeowners should not become complacent with continuing to pay smaller payments.

Any surprising or dramatic jump in inflation could have severe consequences for people who need to make mortgage payments.

Martijn van der Heijden, the Chief Financial Officer for the digital home-buying service Habito, outlined what the latest inflation figures mean for homeowners and potential buyers in the UK.

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Mr van der Heijden said: “Despite today’s decision to keep the base rate steady, it’s only a matter of time before we see it rise.

“The National Institute of Economic and Social Research group has reported that inflation could hit 3.9 percent early next year – almost double the Bank of England’s target.

He explained: “Borrowers who are on a variable rate should still consider the impact that any base rate rises this year could have on their mortgage.

“Even if the rate increases by as little as 0.25 percent, this could see their repayments shoot up by hundreds of pounds a year, so it’s worth looking at all the options.

Inflation: Young couple buying home

Inflation: The Bank of England announced that it expects inflation to peak at 4 percent in 2021 (Image: GETTY)

“With competition between lenders still very high, there are record-low deals of under one percent to be had for two-year fixes, and even some five-year fixes, but we don’t know how long these low rates will last.”

Despite being twice the Government’s target, the bank’s Monetary Policy Committee (MPC) said this latest increase would be “transitory” and would return to two percent in the “medium term”.

The MPC meets eight times a year to discuss the UK’s inflation rate in order to agree on what the base rate will be.

In a statement, the committee addressed the various factors impacting the wider UK economy during the country’s state of recovery following the pandemic.

The MPC explained: “The committee’s central expectation is that current elevated global and domestic cost pressures will prove transitory.

“Nonetheless, the economy is projected to experience a more pronounced period of above-target inflation in the near term than expected in the May Report.”

The committee said: “Alongside temporary constraints on supply, the rapid recovery in demand has eroded spare capacity such that the economy is projected to have a margin of excess demand for a period.

“In the medium term, conditioned on the market path for interest rates, inflation is projected to fall back too close to the two percent target, and demand and supply are expected to return broadly to balance.”

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