Understand how inflation can lead to higher interest rates, as lenders may increase rates to compensate for the decreased purchasing power of money over time. The Bank of England has a target inflation rate of 2% per year.
Consider the potential impact of inflation on your future loan payments, as a higher interest rate can result in increased monthly costs and a longer repayment term. A 1% increase in interest rates could add £50 per month to the average UK mortgage payment, according to UK Finance.
Factor in the potential for wage growth and increased income over time, as this can help offset the effects of inflation on your loan payments. UK wages have grown by an average of 3% per year over the past decade, according to the Office for National Statistics.
Consider a fixed interest rate loan to protect against potential rate increases due to inflation, as this can provide stability and predictability in your monthly payments. 96% of new UK mortgages were fixed-rate in 2021, according to UK Finance.
Regularly review and adjust your budget to account for changes in the cost of living due to inflation, as this can help ensure that your loan payments remain affordable over time. The UK inflation rate reached a 30-year high of 7% in March 2022, according to the Office for National Statistics.