Inflation rises to 3.5% as mortgage rates outlook shifts

Inflation rose to 3.5% in September from 3.1%, the Office for National Statistics (ONS) reported, marking a third consecutive monthly increase and the highest annual rate since last October. Brokers say the figure adds to uncertainty over mortgage rates.

Economists had forecast a rise to 3.4%, so the result came in above expectations. The ONS said rising fuel prices continued to push the figure higher.

ONS chief economist Grant Fitzner said: “Inflation climbed notably in September to its highest annual rate in almost a year.

“Increased fuel prices were again the main driver, with the cost of diesel the highest since July 2022.

“Other upward pressures included airfares and, to a lesser extent, computer games and live events, which are often volatile.

“These were partially offset by the cost of hotel stays, where prices rose by less than this time last year. The annual cost of both raw materials and goods leaving factories continued to rise, driven by higher crude oil and petrol prices, respectively.”

Brokers focused on what the figure means for borrowers and the timing of any change in mortgage rates. The Bank of England’s next base rate decision is due in November.

Rachel Geddes, strategic lender relationship director at Mortgage Advice Bureau, said: “After two rises in a row, a third was always a real possibility, so today’s figure of 3.5% doesn’t tell us anything we didn’t expect. There is some good news, though. In the three months to July, regular wages were 3.5% higher than a year earlier, according to the Office for National Statistics. Once rising prices are taken into account, that’s an increase of 0.6%, so pay is only just ahead of prices.

“For anyone with a mortgage, or planning to get one, what really matters is what the Bank of England does with interest rates next, as that changes the mortgage deals on offer. If you’re a first-time buyer, rising inflation doesn’t close the door on buying, but it can change what you’re able to borrow. 

"Lenders set their fixed rates based on where they expect interest rates to go, not where they are today. Inflation data like this can shift those expectations before the Bank does anything, so a mortgage offer you’re looking at now may look different by November’s base rate decision. If you already have an offer, it’s worth finding out where you stand now rather than waiting to see what happens.

“If your deal ends in the next six months, there’s no need to wait until the next base rate announcement to start comparing your options. Lenders adjust their pricing ahead of Bank decisions, so what’s on offer today may look different by then. For anyone moving home, it’s worth testing your budget against a slightly higher rate than the one you first planned around, so there aren’t any surprises before completion.

“Nobody can say for certain what the Bank of England will do next. What you can do is make sure your plans don’t depend on getting that right, and that’s where an expert mortgage adviser comes in. A headline can’t tell you what this means for your budget, but talking it through with an adviser can.”

Lender pricing and the timing of remortgages also drew comment.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “With the consumer prices index rising to 3.5 per cent in September, marking two years since inflation was last below the Bank of England’s 2 per cent target, the chance of an interest rate rise before the end of the year looks increasingly likely.

“Swap rates, which underpin the pricing of fixed-rate mortgages, have been volatile in recent weeks, resulting in mixed pricing movements by lenders, with some trimming rates while others increase pricing. The average shelf-life of products has also contracted as lenders try to deal with changing funding costs.

“With many borrowers coming up to remortgage from cheap legacy mortgage rates, there may be a significant payment shock ahead. Borrowers can protect themselves as much as possible by speaking to a whole-of-market broker and locking into a new product sooner rather than later. If rates fall by the time they take out the mortgage, they should be able to switch to a cheaper deal at that time, but if rates rise, they will be pleased they acted when they did.”