Inflation has been one of the most talked-about economic issues in the UK in the last couple of years…and with good reason. While falling inflation was meant to bring some comfort to households, recent statistics show that there is still strong inflationary pressure. In July 2025, UK inflation climbed to 3.8%, its greatest since 2024, driven by rising travel, food, and drink prices. For homeowners and prospective homeowners, this leaves one burning question in every mind. How does inflation affect mortgage rates in the UK?
In this article, we will explain how inflation and mortgage rates are connected, why mortgage rates have been slower to fall than expected, and what homebuyers should consider when making their next step.
Why Inflation Affects Mortgage Rates
Inflation measures how quickly the price of goods and services is rising. The long-term target inflation rate for the Bank of England (BoE) is 2%. When inflation is higher than the target, the Bank will increase interest rates to reduce price increases.
Here’s why that impacts mortgages:
Increased inflation can lead to increased interest rates
The Bank of England raises the base rate to discourage spending and borrowing. Mortgage lenders then hike prices to cover their own higher funding cost.
Decreasing inflation could mean that rate cuts may be possible
When inflation is coming down to target, the Bank of England can lower interest rates. This might result in lower mortgage prices, but change isn’t always immediate.
Despite recent cuts in interest rates, the most recent statistics reveal inflation is still being recalcitrant. Growth in air fares and food prices sent inflation to 3.8% in July, which made the UK the G7’s most rapidly growing inflation economy. The Bank of England cut the base rate to 4%, but subsequent cuts will be held back, according to most economists predictions. Our team at Oportfolio expects that there will only be one more cut before the end of the year, with borrowing costs staying higher well into 2026.
For mortgages, it means that while we are not going to see rates jump high as they did in 2022–23 and rates are still slightly dropping across many lenders, it is unlikely there is going to be a sudden significant drop in rates either.
What This Means to UK Mortgage Borrowers
If you’re a UK mortgage borrower, rising inflation has several immediate effects:
Fixed-Rate Mortgages Higher for Longer
Swap rates, which lenders use to set the price of fixed mortgages, have inched up following the recent inflation report. Lenders are reluctant to reduce fixed-rate mortgage terms, despite the base rate falling.
Affordability Tests Tighter
As inflation eats into family budgets, lenders will have to apply tight affordability checks. This can make it harder for borrowers to pass income checks, particularly those who are tightening their belts.
Remortgagers Facing More Pressure
Those homeowners coming off older, lower fixed deals may find that new rates are significantly higher than forecast. This pressure on affordability should continue until inflation is regularly close to the 2% target.
First-Time Buyers Need Larger Deposits
With higher mortgage rates and house prices still high in much of the country, first-time buyers can expect larger deposits or help from relatives to achieve affordability targets.
Will Mortgage Rates Drop?
The Bank of England predicts that inflation will peak in September at 4% and stay over target until around spring-time in 2027. This implies we will not witness dramatic or large-scale reductions in interest rates anytime soon. For borrowers, the takeaway is this, though mortgage rates are not going to surge sharply again anytime soon in our eyes, they could remain higher than many had hoped for longer than they would like. Proven planning and advice are necessary.
How Oportfolio Mortgages Can Assist
At Oportfolio Mortgages, we specialize in assisting homeowners and buyers through tricky market situations. You might be:
- Looking to remortgage and cope with increasing expenses
- A first-time buyer who requires information on affordability
We are able to shop deals around the market and help you locate an appropriate product for your circumstances. Call us today for expert mortgage guidance.
FAQ: Inflation and UK Mortgage Rates
1. Why does inflation affect mortgage rates?
Inflation affects the Bank of England base rate. As levels of inflation increase, the Bank increases interest rates to dampen the economy. Mortgage lenders follow suit, increasing the price of borrowing.
2. Are mortgage prices going down in 2025?
Mortgage prices might fall slightly if inflation reduces, but the Bank of England forecasts inflation to remain above target at 2% for at least until mid-2027. So, prices will not come down anytime soon.
3. What type of mortgage is best in times of inflation?
Most homeowners choose fixed-rate mortgages during inflation to lock in fixed payments and protect themselves from further rate rises.
4. For how long will UK mortgage rates stay high?
Rates are predicted to stay high until inflation drops clearly and consistently. Current projections suggest affordability pressures could last until 2026.
5. What can I do if my mortgage payments are rising?
Speak to a mortgage broker. They can check if remortgaging, extending your term, or switching to a fixed rate can help with the costs.
