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Is Rising Inflation Bad News Or Good?

Is Rising Inflation Bad News Or Good?

by | Jun 11, 2021 | Mortgage News

According to the Office for National Statistics, UK inflation more than doubled from March (0.7%) to April (1.5%). At any other time, this data might have been met with gasps of pure horror. Right now, however, the situation is a lot more complicated. Here’s a quick guide to what you need to know.

 

The world is finally getting back to business

COVID19 is not yet consigned to oblivion but it’s getting there. This is allowing the world, in general, to get back to business. Of course, with so many businesses having been mothballed for most, if not all, of the last year or so, there’s a lot of catching up to do. In particular, the logistics industry needs to deal with a serious backlog – and the recent issue with the Suez Canal didn’t help with that.

This means that right now supply-side issues are limiting the availability of some items right at a time when demand is increasing. Businesses are opening up again, so more jobs are becoming available. Furloughed workers are returning and remote workers are starting to go back to the office at least part of the time. In some cases at least, this will mean them spending money on purchases such as clothes, transport and convenience food and drink.

Overall, therefore, it’s hardly a surprise that UK inflation has shot up. In fact, it would arguably have been more of a surprise if it hadn’t. That doesn’t mean that the increase is welcome news to everyone. As always, there are two sides to every story.

 

Why inflation is bad news

Inflation basically means rising prices. If you’re in strong economic shape, then you can absorb them. If, however, you’re not, then they can be extremely painful. The financial impact of the pandemic has been extremely uneven, to put it mildly. A few people have, quite bluntly, done extremely well out of it. Most people have been able to get by, albeit possibly only just.

For some people, however, the pandemic has wrought serious havoc on their finances. What’s more, a lot of these people would probably have been living on the financial edge anyway. These people may have to deal with prices rising ahead of their income. They may also face the prospect of interest rates rising in line with inflation. This would make using credit as a stopgap even more expensive.

If interest rates do go up, then the cost of mortgages may go up with them. This is, however, also variable, at least in the short term. If new buyers have opted for fixed-interest loans then interest-rate changes will not affect them until the fixed-term runs out. Established buyers with variable-interest loans could switch to a new deal. Those most in danger, therefore, are recent buyers with variable-rate loans.

 

Why inflation is good news

Inflation encourages people to get out and spend. In short, the message is that you can either buy now or risk the price going up later. Obviously, there are limits to this. If people can’t afford something now then they can’t buy it regardless of whether or not it seems like a good deal. What’s more, if inflation gets seriously out of control then it may result in major social upheaval.

The UK is, however, a long way off this. Although 1.5% is way above 0.7%, it’s still comfortably below the Bank of England’s inflation target of 2% with a 1% margin of error in either direction. In fact, 0.7% inflation was actually too low to be desirable. Under normal circumstances, the Bank of England would have been expected to take corrective action.

In short, therefore, the surge in inflation is essentially just a sign that the UK’s economy is starting to get back to where it should be. That fact should be welcomed by everyone.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up
repayments on your mortgage

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Some interesting facts about interest rates

Some interesting facts about interest rates

by | Jul 1, 2019 | Mortgage News

At a very basic level, interest rates are percentage fees levied whenever one person has use of another person’s money.  While the headline numbers can look small, they can have a very big impact so it really does pay to understand how they work.

Interest rates can be simple but they are more likely to be compound

Simple interest rates are based purely on the initial sum lent or borrowed.  For example, if you lent someone £100 and charged 1% per annum simple interest, then each year you will receive £1 in interest.  If, however, you charge 1% per annum in compound interest then the first year, you will receive £1 in interest but the second year, you will receive £1.01 in interest.  This may not seem like much of a change but as the years go by, it will add up.

That was, of course, a very simple example.  In reality, while simple interest really is simple, compound interest can be much more complicated as there can be all different kinds of ways of calculating it, which is why the annual percentage rate (APR) can come in very useful as a guideline to your financial “worst-case scenario”.

Different people (and companies) can be charged different rates for exactly the same product

If two different people (or companies) apply to exactly the same lender for exactly the same product, they can still be charged different rates for it.  This is because the lender will assess risk and reward on an individual basis.

For example, let’s say two borrowers want to buy identical houses on a new-build development.  One has a 10% deposit and is self-employed (albeit with the required level of documentation to show income) and the other has a 25% deposit and is fully employed, has been so for several years and works in a skilled and fairly secure profession.  It’s easy to understand why a lender would see the second borrower as being far lower risk and hence want to attract them with a lower interest rate.

The good news here is that being aware of this reality is a crucial first step in understanding what it means for you and hence what you need to do to manage it.  This basically entails looking at your situation as a whole and deciding where you are prepared to make compromises and where you are not.  For example, if you are currently employed but want to go self-employed, then it may be best to wait until after you have bought a property and been approved for the necessary mortgage, or, if you are already self-employed, then you may want to make sacrifices elsewhere in your life so you can build as big a deposit as you possibly can.

Interest rates are in a constant battle with inflation

If you’re a saver then the only way you can make an effective (i.e. real-world) profit from your cash deposits is by earning an interest rate which is above the rate of inflation.  If you are a borrower, then the only way you can earn a profit on the money you borrow is by generating a return which beats inflation after you have paid your lender interest on the sum which, as we have already seen, needs to make them a profit after inflation.  Whatever way you look at it, inflation is the enemy of profit whether that profit comes in the form of interest rates for savers or investment returns for anyone.  Of course, the fact that people do regularly manage to beat inflation shows that it is possible, however, it is important to keep the effects of inflation in mind when taking any financial decision, including assessing interest rates.

Your property may be repossessed if you do not keep up repayments on your mortgage.