What is inflation?
Inflation occurs when there is a general increase in the price of goods and services, which leads to a fall in the value of your money compared to before.
For example, a can of Heinz baked beans in January this year cost a whopping 18% more than the year before. Heinz baked beans made the news recently over a dispute with Tesco following an attempt to put up their prices further still. Tesco refused to sell their beans until they came to an agreement on a fairer price.
Following this example, it means that you get less baked beans for your money than you would have been able to buy a year ago. The current rise in inflation is impacting most goods and services, including materials for home repairs.
What is the inflation rate?
The Consumer Prices Index is used to measure the rate of inflation by measuring the value of items compared to the previous price. It is calculated by comparing the prices of 650 items which are meant to represent a basket of goods and services bought by the ‘average’ UK household.
The rate of inflation rose by 8.2% in the 12 months to June 2022, up from 7.9% in May.
Of course inflation impacts on different items in different ways, as proven by the price of Heinz baked beans going up by more than 8.2%!
How interest rates affect your loan
So where do loans come into play when inflation is involved? And how does inflation impact loan interest rates?
When the inflation rate goes up the interest rates for loans often go up as well, usually caused by the Bank of England increasing the base rate in an attempt to bring inflation under control. This increase impacts all forms of credit, including mortgages, personal loans and credit cards and means the cost of borrowing goes up in many cases. Depending on the terms of the loan this can also mean that the monthly repayments are increased.
If you have a fixed interest rate on a loan you have already taken out, the wording ‘fixed’ means the interest rate will not go up.
If you have a variable rate, it will usually go up each time the Bank of England rate increases.
We have already seen that loan rates have gone up in line with the Bank of England putting the base rate up to 1.75%.
For example in August 2022, if you had a 2.5% tracker rate mortgage, the interest rate will have increased to 3%. This would mean an increase of £38 a month to a £150,000 repayment mortgage with 20 years remaining.
If you are struggling to afford your mortgage or other loans, we strongly recommend that you seek debt and money advice to help you.
So if you are looking to take out a loan, you will generally find that if inflation is increasing, the interest rate on loans will go up as well.
Borrowing costs can change over time. If you are considering a loan, check the current rate, total amount repayable and whether the repayments are affordable for your circumstances
Our loans are funded by local councils. This means that we can offer you a low interest rate.
Your local council policy will determine who is eligible to apply for a loan and the home works that are eligible. For more information, please contact us.
Representative Example (4% fixed interest rate, Representative 4.2% APR).
Loans are subject to status and are typically protected by a Title Restriction.
