Households could see mortgage rates once again edge up again over the coming weeks thanks to a surprise uptick in inflation.
Inflation rose to 3.8 per cent in the 12 months to July – up from 3.6 per cent in June and ahead of market expectations.
One cause behind the spike in prices is the fact there appears to have been a rise in spending around the Oasis tour.
The Gallagher brothers have been driving up hospitality prices in the cities hosting their gigs, with hotel and restaurant spending rising 3.4 per cent.
‘Inflation has shot up again, with some saying the ‘Oasis bump’ is to blame,’ said Katy Eatenton, mortgage & protection specialist at St Albans-based Lifetime Wealth Management.
‘Borrowers will certainly be looking back in anger. This is not good news for mortgage rates and the rate cuts we have had in recent weeks may soon be reversed.
‘If you’re approaching the end of your mortgage, try to lock in as soon as possible as lenders could start to increase rates in the days and weeks ahead.’
We’re all part of a master plan: Oasis gigs appear to be a contributing factor to higher inflation this month, which could stop the Bank of England from cutting interest rates
However, there are other inflationary factors at play.
For one, the cost of airfares rose by 30.2 per cent between June and July, in response to increasing holiday demand.
Why rise in inflation could mean higher mortgage rates
The bigger than expected increase in rate of inflation will raise further questions around future interest rate cuts.
The Bank of England cut base rate to 4 per cent on 7 August. Base rate has dropped by 1.25 percentage points since August 2024 when it was first cut from 5.25 per cent.
Base rate is the single most important interest rate in the UK. It determines the interest rate the Bank of England pays to commercial banks that hold money with it and therefore influences the rates those banks charge people to borrow money or pay on their savings.
The theory is that raising interest rates lifts the cost of borrowing for individuals and businesses and thus reduces demand for it, slowing the flow of new money into the economy and applying the brakes.
In contrast, cutting interest rates lowers the cost of mortgage rates and other borrowing and increases demand, pushing the accelerator on the economy.
The central bank has set a 2 per cent target for inflation and if the current levels persist it could result in MPC members refraining from rate cuts in the future.
The Bank of England itself is now predicting that inflation will hit 4 per cent in September.
Hopes of another base rate cut this year now look decidedly optimistic, according to Peter Stimson, director of mortgages at the lender MPowered.
‘Today’s painful jump in inflation means that base rate cut may now be pushed back into 2026, and as a result we are unlikely to see any further rate cuts from lenders in the immediate term.
‘Competition between lenders is intense but mortgage rates may well have fallen as far as they can for now.
‘They may even creep up over the next month or so as lenders recalibrate in response to rising swap rates.’
Inflation watch: Inflation has risen to 3.8% and continues to stick above the bank of England’s 2% target
Where are mortgage rates now?
Mortgage borrowers have been enjoying a market where rates have been dropping of late.
Last week, average two-year fixed rate mortgages dipped below 5 per cent for the first time in almost three years.
The average two-year fixed rate across all mortgage products is now 4.98 per cent, according to Moneyfacts, slightly below the average five-year deal at 5 per cent.
This means that the typical household fixing a £200,000 mortgage for two-years with a 25-year repayment term will be paying £1,167 a month.
However, many households and homebuyers will likely find they can now secure rates below 4 per cent.
For example, someone remortgaging with at least 40 per cent equity in their home can now secure a 3.78 per cent two-year fix with Santander.
Meanwhile, someone buying with a 15 per cent deposit can now get a 3.94 per cent two-year fix with Yorkshire Building Society or a 3.95 per cent deal with Santander.
‘Fixed rates have been pricing in the recent and future cuts, so have been edging down with a host of deals now below 4 per cent,’ said David Hollingworth, associate director at L&C Mortgages.
‘Those reductions have tended to come in small increments, but we could see that slow further or even reverse in some cases if the market reacts badly to the threat of higher inflation than was previously expected.
‘Borrowers holding out for more cuts may want to keep close tabs on mortgage rates.
‘It’s far from doom and gloom but securing a rate now will protect against any turnaround but still allow a further review before completion, if there are further improvements.’