Record inflation rises promote mortgage protection

The latest UK Consumer Price Index (CPI) figures show that annual inflation hit 2.9 percent in December 2009, up from 1.9 percent in November 2009.* This one percentage point rise in annual rates is the largest increase in inflation between two months (under the CPI measure) ever recorded. The Retail Price Index (RPI) measure of inflation increased from an annual rate of 0.3 percent in November 2009 to 2.4 percent in December 2009. This increase in annual RPI inflation of 2.1 percentage points was the largest seen in the UK since July 1979.

Given that the Bank of England’s Monetary Policy Committee (MPC) has the primary objective of achieving the governments CPI inflation target of 2 percent over the medium term, these latest figures put a great deal of pressure on the MPC to increase interest rates (the Bank of England’s Base Rate). With the amount of money that the Bank has printed in the recent past it is likely that marked inflation rises will be a theme for 2010 and the Bank will, at some point, have to hike interest rates considerably to counter this.

The potentiality significant impact this can have on mortgage holders is twofold: higher mortgage interest rates and a greater risk of failing to make payments due to redundancy. The interest rate charged on most UK mortgages is closely tied to the Bank’s Base Rate, so for flexible rate mortgage holders a significant and continual rise in the Base Rate means a sustained period of rising mortgage payments, all during a period of pay freezes. To make matters worse, the combination of pay freezes (resulting in very low wage inflation) and rising CPI inflation would result in a fall in disposable income as the cost of everyday goods and services increase at a faster rate than wages. All this means that the amount of funds left in the kitty to pay for rising monthly mortgage payments would be significantly reduced.

On the second point, rising interest rates make the cost of borrowing more expensive meaning that consumers will be lest willing to spend and businesses less willing to invest. As a result, the reaction of the MPC to curtail rising inflation will put downward pressure on economic growth and jobs, all at a time when the UK economy is already trying to limp out of recession. What this means is that the mass redundancies seen over the recent past could become a feature of the immediate future also.

It appears from the inflation and economic growth figures that the MPC are having to walk a very shaky tightrope between rapidly rising inflation and recession. In any case, the outlook for mortgage holders is very uncertain. During these times it would appear financially prudent to take out mortgage protection. Given the risk of redundancy, the most appropriate policy would be mortgage payment protection insurance, which will pay your monthly mortgage loan payments if you were to off work due to accident sickness or unemployment.

If you need any advice or information relating to mortgage protection insurance then please do not hesitate to call us on 0208 432 7333 or email

*For news, information and data on UK inflation or economic growth please navigate to the website of the Office for National Statistics.