The Bank of England says inflation is likely to drop next year, and expected to be close to two percent in around two years. The cost of living crisis has put many into situations they’ve never had to face before, but experts believe it could be years before inflation turns around.
Homeowners still repaying their mortgage have found themselves trapped between rampant inflation, decade high interest rates and a cost of living crisis that is continuing to worsen.
David Woodward, MD of Woodward Financialsexplained that the Bank of England raises interest rates to keep their grip on inflation by reducing disposable income.
This in turn sees prices dropping over time, as Mr Woodward said: “We have not seen a sharp shock but this is exactly what is needed.”
The struggle may be far from over, as the expert believes many homeowners will be significantly impacted in the coming years, particularly if they are on a variable, base rate tracker or capped rate mortgage.
Mr Woodward shared some insights, understanding that many households are stuck trying to decipher when to fix their rates and how much higher interest rates will go.
He said: “Inflation will not reduce until an equilibrium is met, in some European countries’ inflation has passed 11 percent with the UK likely to surpass 10 percent soon.
“Prices are likely to continue to rise with inflation and won’t start to fall until people stop paying the ever-increasing prices. This won’t stop until surplus household income and credit card limits have been exhausted. At this point prices will stagnate then start to fall and will continue to fall until the consumer starts spending again, unfortunately in the current climate it could take many months if not years. “
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“We will start to see people choosing to hold off on any big purchasing decisions, such as extensions, kitchens or a new car. In periods of recession, unemployment rises and people worry about their job stability, they are certainly not looking to increase their mortgages or take on more debt.
“If you are approaching retirement or still paying mortgages and debt, the uncertainty of what could occur in the coming years may be giving you sleepless nights. Although unpleasant, there will be an end to higher inflation.
“For those that may fall into difficulty, the below will hopefully give some comfort that there is regulation in place to protect the borrower.”
The Mortgage Conduct of Business Regulations state borrowers who have arrears or mortgage shortfalls must be dealt with fairly, and the lender is responsible for dealing with customers and undertaking some actions.
- Seeking Agreement – The lender must use reasonable effort to reach an agreement with the borrower to repay the arrears
- Liaise – The lender must liaise with a third-party to advise on the arrears
- Allow time – The lender must have a reasonable approach to the time over which the arrears should be repaid, this must also take into account the borrower’s circumstances
- Permit changes – The borrower must be allowed to change the mortgage payment date or repayment method, unless the lender has a good reason to not do so.
- Consider options – If no reasonable payment arrangement can be made, the lender should consider allowing the borrower to remain in the property until it is sold.
- Last resort – The lender should only take possession of the property as a last resort is all other reasonable attempts to resolve the debt have failed.
Mr Woodward suggested, regardless of the type of debt, that Britons contact their lender to try to reach a resolution, continuing: “Whether it be secured or unsecured debt, a mortgage, loan or credit card, speak to the lender to come to an agreement.
“Putting your head in the sand won’t fix the problem, speak to the lender and don’t wait for them to contact you, the sooner you address the problem the sooner the worries will go away.
“It is not for me to say how you should cut your cloth to get over this inflation period, but a good start is ‘What do you need to get by’, not ‘What do you want’.”
During the pandemic, the Bank of England base rate remained at a record low of 0.01 percent.
While this was disastrous for savers, it allowed those in debt to catch their breath and hold onto their pennies during a global crisis.
However, that leeway is now long gone and many are unsure of how to go forward as the base rate hit a decade high of one percent and the cost of living continues to rise.
Interest rates have a direct effect on those in debt, whether it be through mortgages, credit cards or loans, meaning more people struggle to keep their bills paid.
Undeniably this is having a great impact on those with mortgages trying to pay off their homes, but it could also indirectly hurt those looking to get on the property ladder.
Mr Woodward explained: “Low interest rates tend to result in rising property prices and high interest rates tend to cause falling property prices, this is not always the case, in the 2008 financial crash we witnessed lower property prices even when interest rates were low. “
He added: “The impact of rising interest rates is only going to get worse for the foreseeable.
“The Bank of England monetary policy committee sets and announces UK interest rate decisions eight times a year and they have a particularly difficult job on their hands.
“The furlough seeds sowed by the Chancellor in the early months of the pandemic have not helped and we must all reap what he has sowed.”
It was expected the recovery from the pandemic would prove financially troublesome, but one unexpected crisis has compounded these issues.
The invasion of Ukraine, and subsequent sanctions on Russian oligarchs, have hit industries and economies worldwide, most notably oil and gas which was already bordering unaffordable for many.
All combined, this perfect storm of a global financial situation has seen inflation reaching seven percent and expected to even hit double digits.
As a result, the British public currently have less disposable income, the amount left after bills and necessities are paid for, than they did during the 2008 financial crisis.