Do Mortgage Payments Increase With Inflation? (2024)

A rise in inflation can have a significant impact on the cost of living, with the costs of goods and services increasing and becoming harder to afford. Mortgage payments are a lot of people’s largest expense, so wanting to know how inflation will affect it is completely understandable.

Yes, mortgage payments increase with inflation although only if you’re on a variable rate mortgage. When governments increase interest rates to help reduce inflation, if you’re on a fixed-rate mortgage your payments will remain the same.

In this post, I’ll explain exactly how inflation affects mortgage payments, strategies you can put in place to help protect against inflation as well as how you can use inflation to your advantage.

How Does Inflation Affect Mortgage Payments?

Inflation is the general increase in the price of goods and services over time. As prices increase, each unit of currency can buy fewer goods and services which is why it’s commonly referred to as a reduction in purchasing power.

Governments around the world try and control inflation to be around 2% each year. If inflation goes above this level like it’s doing now, governments step in and one tool they have at their disposal is to increase interest rates.

Increasing interest rates aims to make borrowing money more expensive, reducing the number of people and organisations borrowing and spending money. This causes a reduction in demand in the economy for goods and services which helps to lower inflation back down to manageable levels.

Regular repayment mortgage payments are made up of two elements, principal payments and interest payments. Principal payments are money that is used each month to pay off the outstanding balance that you borrowed initially, whereas interest payments are the amount you’re charged for borrowing the money itself.

As the government increases interest rates to help reduce inflation, this increases the interest rate on your mortgage and your monthly mortgage payments start to increase.

However, if you’re on a fixed-rate mortgage you may be protected from these interest rate increases which I’ll explain below.

Does Inflation Affect Fixed-rate Mortgages?

No inflation does not affect fixed-rate mortgages as the interest rate is fixed at a specific rate for a set period agreed at the start of your mortgage. This means monthly mortgage payments will remain constant until your fixed period ends.

How Does Inflation Affect Mortgage Payments?

Most mortgage lenders offer a fixed-rate period of usually 2 or 5 years, however, more mortgage lenders are starting to offer 10 year fixed rates or even longer.

Whilst having a fixed-rate mortgage is great when interest rates and inflation is on the rise, you can also lose out if interest rates start to fall. This is because you’ll be stuck paying a higher rate of interest when there are lower interest rate deals available on the market.

You’re also stuck because a lot of fixed-rate mortgage deals have quite harsh penalties for ending the mortgage within the fixed-rate term. This can be between 1% to 5% of the amount you borrowed which can add up to quite a significant sum of money.

This is the trade-off that you’ll have to make. Take the risk that mortgage rates rise and potentially have your mortgage payments increase, or fix your mortgage to keep your payments static.

How Much Will Inflation Affect Mortgage Payments?

Every 1% increase in interest rates that you get on your mortgage is worth £83 per month per £100,000 you have outstanding on your mortgage. I’ve included a table below showing different scenarios.

Effect of Increase In Interest Rates on Monthly Mortgage Payments1% increase2% increase
£100,000 mortgage balance outstanding£83£167
£200,000 mortgage balance outstanding£167£333
£300,000 mortgage balance outstanding£250£500
£500,000 mortgage balance outstanding£417£833

As you can see if you have a large mortgage balance an increase in interest rates can have quite a big impact on your monthly mortgage payments.

It’s also worth pointing out that when governments increase interest rates, they typically talk about basis points. There are 100 basis points in 1%, so each basis point is 0.01%. This means if they were to only raise interest rates by 50 basis points, that would only have half the effect of the 1% increase shown in the table.

Mortgage lenders may also increase interest rates on top of any government changes to control inflation. They can’t do this if you’ve already got a mortgage, however, if you’re in the market for a new mortgage, interest rates could be increasing as lenders are either trying to reduce their risk or earn more money. I agree, cheeky!

This is why getting a long term fixed rate that you’re comfortable paying each month can help avoid the uncertainty that comes with a variable interest rate that can change.

Is Inflation Good For Mortgage Holders?

Inflation can be good for mortgage holders as it allows borrowers to pay the money back with money that is worth less than when it was initially borrowed. For example, getting an annual pay rise to account for inflation makes it easier to pay back your mortgage.

Also, inflation usually increases property prices (if you’re in the right area) which can be a great boost to your net worth. This can also decrease your loan-to-value ratio which can help you secure lower interest rates when you come to remortgage.

However, depending on where you are on the property ladder, if you’re looking to buy a more expensive property in the future, higher inflation can be bad as the property you’re looking to buy will become more expensive. Any gains you’ve seen on your property value will be more than offset by what you will have to pay for your next property.

Also as discussed within this post, your mortgage payments may also increase. If you are on a variable rate mortgage and are worried about your mortgage payments going up, this could be a good time to remortgage onto a fixed-rate mortgage, I’ll explain more below.

Remortgage To Get Lower Rates

If you are on a variable rate mortgage when interest rates increase your mortgage payments will also increase. This risk can be avoided if you remortgage onto a new fixed-rate mortgage which will keep your mortgage payments constant throughout your fixed-rate period.

This can be really useful to help save money in the event that interest rates increase as well as make it easier to plan your household budget as your mortgage payments will remain static.

You may now be wondering how long you should fix your mortgage. I’ve written a post that goes into detail on how long you should fix your mortgage that you may find useful.

Summary – Do Mortgage Payments Increase With Inflation?

Overall, mortgage payments do increase with inflation which can be an unwelcomed additional monthly expense.

However, if you’re on a fixed-rate mortgage your mortgage payments will remain the same for the length of your fixed period. You may also benefit from inflation with the rise in the value of your property and also being able to pay the money

If you are worried about inflation affecting your monthly mortgage payments or want to put things in place to help protect yourself, definitely speak to a mortgage broker. They can give you advice specific to your circumstances as well as give you all of your available options.

I hope this post has helped and given you some strategies to help combat inflation.