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What happens to mortgage rates when inflation falls?

What happens to mortgage rates when inflation falls?

Date: 17 August 2023 | By: Marketing

It was announced this week that the rate of price rises has fallen quite sharply, and so the overall inflation figure has fallen from 7.9% to 6.8. How does this affect borrowers?

When inflation falls it can have several implications for mortgages, borrowers and the wider housing market.

Lower Interest Rates: Central banks often respond to lower inflation by cutting interest rates. This can lead to reduced borrowing costs for mortgage holders. Existing variable-rate mortgage holders may see their monthly payments decrease if their mortgage rates are tied to the base rate, which typically follows the central bank's actions.

Fixed-Rate Mortgages:

If you have a fixed-rate mortgage, your interest rate remains unchanged for the duration of the fixed period. A fall in inflation might not have an immediate impact on your monthly payments which may feel irksome, but it could influence your options if you are considering switching to a new mortgage deal when your fixed term ends.


Lower inflation can lead to stable or increased purchasing power for consumers. This could make it easier for potential homebuyers to afford a mortgage, particularly if wages are keeping pace or rising relative to inflation.

Market Sentiment:

Falling inflation could contribute to positive market sentiment, as it may indicate a healthier economy. This could potentially lead to increased demand for housing, with this demand then becoming responsible for an increase in property prices. This is great if you are already a homeowner but presents challenges for those who are not yet on the property ladder.

Investment Opportunities:

Lower inflation might encourage investors to seek out assets such as property to contribute (or make up) their pensions. This increased demand could also impact property prices.


Lower inflation could lead some borrowers to consider reviewing their mortgage product in order to take advantage of lower interest rates and therefore decrease their monthly repayments or maintain them but reduce the term of the mortgage.  This can result in reduced monthly payments or the ability to pay off the mortgage sooner.

Bank Lending Policies: Banks and lenders adjust their lending policies in response to changes in economic conditions and this includes inflation. As a result, when inflation falls lenders might become more willing to extend credit, potentially making it easier to obtain a mortgage.

It's important to note that these effects are interconnected and influenced by a variety of factors, including broader economic conditions, government policies, and global financial trends. Additionally, changes in inflation rates can have a lagging impact on the mortgage market, as lenders and borrowers respond to evolving economic circumstances. If you are a mortgage holder or are considering getting a mortgage, it's a good idea to monitor the economic environment and consult with a whole-of-market mortgage adviser like First Mortgage Solutions.

First Mortgage Solutions is a team of experienced whole-of-market mortgage brokers working with first-time buyers, home movers and retired clients, based in South Wales and working with clients throughout the UK.


*Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.