Rising inflation can have a powerful impact on the housing market, leaving a mark on mortgage interest rates, and on the financial wellbeing of homeowners and prospective buyers alike.
Rising inflation can have a powerful impact on the housing market, leaving a mark on mortgage interest rates, and on the financial wellbeing of homeowners and prospective buyers alike.
For example, the Consumer Price Index (CPI) annual rate has witnessed a notable rise every month since August 2021:
Source¹ : ONS
In response, the Bank of England has increased its base rate 14 times since December 2021 in order to try and bring the inflation rate down to its target level of 2%:
BOE Official Bank Rate:
| Year | Date | Month | New rate % |
| 2021 | 16 | Dec | 0.2500 |
| 2022 | 3 | Feb | 0.5000 |
| 2022 | 17 | Mar | 0.7500 |
| 2022 | 5 | May | 1.0000 |
| 2022 | 16 | Jun | 1.2500 |
| 2022 | 4 | Aug | 1.7500 |
| 2022 | 22 | Sep | 2.2500 |
| 2022 | 3 | Nov | 3.0000 |
| 2022 | 15 | Dec | 3.5000 |
| 2023 | 2 | Feb | 4.0000 |
| 2023 | 23 | Mar | 4.2500 |
| 2023 | 11 | May | 4.5000 |
| 2023 | 22 | Jun | 5.0000 |
| 2023 | 3 | Aug | 5.2500 |
Source² : BOE
This upward trajectory in the base rate serves as a stark reminder of the relationship between inflation and the Bank of England base rate. The base rate, in turn, has an impact on mortgage rates.
The connection between inflation and the Bank of England's base rate decisions is deeply rooted in historical precedent. A retrospective glance at the 1970s, a period marked by rising inflation, reveals the decisive actions taken by the Bank, substantial hikes in the base rate, reaching an unprecedented peak of 17% by the end of 1979. These bold moves responded directly to rising inflation, eventually curbing its advance and restoring greater economic stability. However, the interest rate hikes raised mortgage rates and dramatically increased the cost of borrowing for homeowners.
The consequences of rising inflation and interest rates are felt most acutely in tracker rate and standard variable rate mortgages, where the link to the Bank of England’s base rate is direct and immediate. Historical records from the tumultuous 1970s offer a sobering illustration of how inflation can precipitate mortgage rate hikes, with new borrowers in 1979 facing an average mortgage rate of 12.38%, a substantial increase from preceding years. This stark reality underscores the financial strain that homeowners have to endure during periods of escalating inflation as their monthly mortgage payments swell, potentially straining household budgets to breaking point. Fast forward to recent times when the CPI annual rate has risen above the Bank of England’s target inflation rate of 2% every month since August 2021, including in the range of 9% - 11.1% during the April 2022 – March 2023 period. In response, the Bank of England has raised its base rate from 0.25% in December 2021 to 5.25% in August 2023.
Amidst the turbulence of rising inflation and interest rates, those who chose relatively low 2-year or, especially, 5-year fixed mortgage rates before the base rate started to rise gained a measure of protection. However, this was only for a limited period; as these fixed rate periods came to an end, the new rates borrowers had to choose, whether fixed or tracker, were inevitably much higher.
The Bank of England sheds light on another prudent strategy adopted by households during previous periods of inflation and high interest rates, such as the 1970s: a trend towards excess mortgage repayments or overpayments. By prioritizing the reduction of their outstanding mortgage balance, homeowners mitigated the longer term impact of interest rate hikes and bolstered their financial resilience in the face of economic uncertainty. However, many households do not have the level of income and savings necessary to be able to make overpayments sufficient to make a significant dent in their outstanding mortgage balances.
Another strategy for short term protection is government help. For example, depending on their circumstances, Support for Mortgage Interest (SMI) loans can help eligible homeowners with mortgage interest payments on their outstanding mortgage balances of up to a maximum of £200,000. SMI loans cannot be applied to mortgage interest arrears. To be eligible for SMI loans, homeowners must qualify for a benefit such as Income Support, income-based Jobseeker’s Allowance, income-related Employment and Support Allowance, Universal Credit or Pension Credit. SMI loans are repayable with interest when the property is sold or transferred.
Average house price increases in the UK, especially in certain areas such as London and the South East, have for decades outstripped increases in average incomes. This means that the size of deposits and mortgages required for new home purchases has increased significantly and disproportionately compared to income, over time. Thus, house price inflation also has an impact on mortgage size and mortgage repayments. This situation is exacerbated further when the Bank of England raises interest rates to combat inflation, which leads to a rise in mortgage rates.
The complexities inherent in the mortgage market due to an ever changing economic landscape can make professional financial advice invaluable. By consulting financial advisors who are well versed in the nuances of mortgage products, interest rates and the broader economic climate, homeowners can understand their options better and make informed decisions aligned with their longer term financial objectives.
Inflation can be a pervasive force that ripples through the fabric of the economy, leaving an indelible mark on mortgage rates and the housing market. By staying informed and seeking expert advice, homeowners can navigate these economic currents with greater assurance and strategic insight. As history has repeatedly demonstrated, understanding and planning are keys to weathering financial fluctuations and safeguarding one’s investment in the property market.
A: A persistent rise in inflation above its target inflation rate of 2% prompts the Bank of England to raise its base rate. This change directly impacts tracker rate and standard variable rate mortgages, where interest rates are aligned with the base rate. Consequently, as the base rate rises, so do the interest rates on these mortgages. Base rate rises also feed through to the new 2-year or 5-year fixed rates that mortgage lenders are willing to offer.
A: Rising inflation can lead to higher interest rates for mortgages with tracker rates and standard variable rates, thus increasing monthly payments. If you have a relatively low fixed-rate mortgage, your payments will remain unchanged during the term of that fixed rate, regardless of inflation and interest rate changes. However, you will be impacted when your fixed rate period ends and you have to choose a new rate, whether fixed or tracker.
A: One way is by securing a fixed-rate mortgage while rates are low. This locks in your low mortgage rate for a set period, shielding you from an immediate rate increases flowing from the Bank of England’s response to inflation. Budgeting conservatively and setting aside savings can also provide a buffer against financial strains ultimately caused by inflation. Overpayments, to the extent possible, can also help weather the storm.
A: Yes, the government occasionally introduces schemes to help homeowners struggling with mortgage interest payments. For instance, the Support for Mortgage Interest (SMI) loan scheme helps eligible homeowners pay interest on their mortgage up to a certain level. Keeping informed about such schemes can provide some welcome and necessary relief during difficult times.
References:
1. Consumer price inflation, UK: March 2024 | Released on: 17 April 2024 | ons.gov.uk
2. Interest rates and Bank Rate | Last Updated: 01 February 2024 | Bank of England
About the author
Pauzible Team
Editorial Team
The Pauzible Team consists of finance professionals and property market specialists dedicated to reinventing home ownership and BTL financing. With deep expertise across UK real estate and innovative financial products like Equity Partnership Agreements, we provide landlords and homeowners with the insights they need to unlock equity, navigate market volatility, and build sustainable wealth through property. Our mission is to make complex property finance simpler, quicker, and more accessible for everyone.
Explore how accessing equity from your BTL property could support your business investment plans.
No obligation. Just a clear view of what might be possible.
Pauzible Asset Services (UK) Limited is registered in England and Wales with Company number 15917067. Our registered office is at 38 Lombard Street London EC3V 9BS. Pauzible is a trading name of Pauzible Asset Services (UK) Limited. Pauzible Asset Services (UK) Limited is registered with the Information Commissioner's Office with Registration reference ZC088971.
Pauzible Asset Services (UK) Limited's business falls outside the scope of financial services regulation & Pauzible Asset Services (UK) Limited is, therefore, not authorised and regulated by the Financial Conduct Authority. This means that you do not have any of the protections under the Financial Conduct Authority rules and do not have any cover from the Financial Ombudsman Scheme or the Financial Services Compensation Scheme in relation to any contract that you may have with Pauzible Asset Services (UK) Limited. Customers should ensure they understand what this means before they use the Pauzible product.
Telephone calls may be recorded for quality assurance, training, and monitoring purposes.
© 2026 Pauzible. All rights reserved.
