The effects of so-called ‘Trumpflation’ would add up to £1,050 to the typical mortgage bill in the ‘best case’ scenario where inflation peaks at 3.6% and mortgage rates edge down. But in the most likely course of events, mortgage repayments will climb by up to £1,950 a year.
The Bank of England (BoE) has set out three stress scenarios based on how the impact of Trump’s war in on Iran will impact our economy.
It has looked at how the closure of the Strait of Hormuz is impacting energy prices and how this will then drive inflation. To help mortgage borrowers better understand the impact, INTEREST fromMoneyfacts has used historic data to illustrate how this will affect people’s mortgage repayments.
In the most benign turn of events, ‘Scenario A’, energy prices will ease quickly, with inflation hitting a high of 3.6% and falling below 3% next autumn. The INTEREST fromMoneyfacts analysis shows mortgage rates will edge down sooner in this situation, potentially adding between £150 to £1,050 to typical mortgage repayments.
In scenario B, the most likely case, energy prices fall more slowly, inflation will peak at 3.7% and the typical mortgage bill will elevate by somewhere between £1,050 and £1,950. In this, the most likely scenario, average mortgage rates would reach 5.5% or 6%.
In the worst-case scenario – ‘C’ – oil remains above $120, inflation peaks at 6.2%, and base rate could rise to 5.25% – pushing average mortgage rates towards 6.75%. This could add up to £3,380 a year to the typical household’s mortgage bill.
Adam French, head of consumer finance at Moneyfacts, said: “The Bank of England’s “Trumpflation” stress scenarios lay bare just how damaging the economic repercussion of the Iran conflict could become.
At one end, a relatively benign path would see energy prices ease quickly, with inflation peaking at around 3.6% before falling back below target next year. At the other, a prolonged period of elevated oil prices could drive inflation as high as 6.2%, forcing a much more aggressive response from the central banks rate setters.
“For borrowers, the difference between those paths is brutal.”
How can borrowers prepare for the worst-case scenario?
If you are worried about your mortgage repayments because you are due to remortgage in the year ahead or planning to buy a house, there ways to mitigate these potential rises.
French said most lenders allow you to secure a new deal up to six months before your current fixed rate expires, effectively giving you the option to ‘lock in’ to today’s rates as insurance.
“If rates rise, you’re protected and if they fall, you can often switch to a cheaper deal before the new one begins,” he said.
“It’s also worth speaking directly to your broker or lender about flexibility options, such as extending the mortgage term to reduce monthly repayments, although this will increase the total interest paid over the lifetime of the loan.
“In a volatile market, being proactive and keeping options open can make a meaningful difference to borrowing costs.”
What else can borrowers do to reduce their mortgage costs?
Find the right type of mortgage for your needs
It’s not just about timing, borrowers can find the best rate for them by using a broker to help them scour the market and potentially find the deal that suits their finances.
Nicholas Mendes, mortgage technical manager at John Charcol, said borrowers should look beyond the headline rate. “Product fees, valuation costs, cashback, affordability rules and whether a lender will allow a simple product transfer can all affect the real cost,” he said.
“In some cases, staying with the existing lender may be the quickest route. In others, remortgaging elsewhere could unlock a better deal.”
Overpaying
If you are currently on a fixed-rate deal with a good rate, you could look whether you have the ability overpay. Mendes said: “Even modest extra payments can help reduce the balance over time and soften the impact of higher rates later, but borrowers need to check their lender’s overpayment limits first, so they do not trigger early repayment charges.”
Extending the mortgage term
Mendes urged caution with this one, but explained, for those genuinely struggling with monthly payments, extending the mortgage term can reduce the immediate cost.
He added: “It should not be treated as a free fix because it usually means paying more interest over the life of the mortgage. It is a useful pressure valve, not a decision to make lightly.”
Make sure you are ‘mortgage-ready’
In the run up to your mortgage application, apply the principals of good money management. Don’t overspend and ensure you are on time with bills.
“Borrowers planning to remortgage should also be careful about taking on new credit before applying,” said Mendes. “Car finance, loans, or larger credit card balances can all affect affordability, and in a tighter market that can reduce what a lender is prepared to offer.”
Don’t wait till the last minute
Mendes said the key message was not to wait until the last minute to remortgage. “In a market this jumpy, time is one of the few thing’s borrowers can still control,” he said.
“The cheapest-looking rate is not always the best answer once fees, flexibility, cashback, and lender criteria are taken into account.”
