Key Highlights :
When it comes to mortgages, the Bank of England's decisions on base rate are key. In recent months, it has become increasingly clear that inflation and wage growth figures are also important in determining what the Bank will do with base rate, and thus mortgage rates.
The Bank of England has been attempting to reduce inflation to its target of 2 per cent by raising base rate from 0.1 per cent to 5.25 per cent. This is because raising the cost of borrowing for individuals and businesses reduces the amount of new money entering the economy, thus reducing inflation. However, the Bank is also concerned that rising wages will feed into inflation, as companies may raise prices to protect their profit margins.
What falling inflation means for mortgages
The latest inflation figures are good news for mortgage borrowers, as they have reduced the chance of further base rate rises. In response to this news, mortgage lenders have cut their rates, with Santander, NatWest, HSBC and Nationwide all slashing prices.
UK inflation dropping to 6.8 per cent in the year to July is in line with market expectations. However, it is still above the Bank of England's target of 2 per cent a year. Nick Mendes, mortgage technical manager at mortgage broker John Charcol, believes this week's inflation figures are good news in the long term for borrowers, as it means reduced chance of more base rate hikes - and of more expensive mortgages.
What will higher wages mean for mortgage rates?
The record annual wage growth in the three months to June is likely to reinforce the Bank of England's concerns over the pressures fuelling inflation and may tempt it to keep base rate higher for longer. Ruth Gregory, deputy chief economist at Capital Economics, believes the Bank will raise rates further, by another 25 basis point hike, from 5.25 per cent to 5.5 per cent in September.
This means that although mortgage rates may come down a little over the coming weeks and months, they will remain relatively high for some time. John Charcol's Mendes adds that it will take a few months before we see any substantial decreases in fixed rate pricing, but that we should expect to see small reductions over the next few weeks before lenders start to compete with one another again. He predicts that by the end of the month, we could see high street lenders pricing in a low 5 per cent deal and potentially a lender break below the 5 per cent barrier by early September.
What about house prices?
Typically, the more someone earns the more they are able to borrow, and higher wages would arguably put upward pressure on house prices. However, higher interest rates will continue to keep a firm lid on house price growth for the time being, according to Mendes. He says that while wages will help ease the burden of increases encountered over the past 12-18 months, the costs of borrowing and household expenditure still remain relatively high and will put a dampener on house price growth.
Overall, the combination of higher wages and lower inflation may seem like good news, but it could mean that mortgage rates stay high while house prices stagnate. It is important for homeowners to keep an eye on inflation and wage growth figures, as they could have a dramatic effect on their finances.