What is the impact of inflation on mortgage interest rates?

Inflation generally drives interest rates up because lenders want to maintain their profit margins in the face of decreasing purchasing power. When inflation rises, the value of money diminishes over time, which means that the returns lenders receive on the money they loan out will also have less purchasing power in the future. Therefore, in order to compensate for this expected loss, lenders increase interest rates.

Moreover, central banks, such as the Federal Reserve in the United States, often respond to rising inflation by raising benchmark interest rates to curb spending and cool down the economy. This action typically translates into higher mortgage interest rates. This relationship helps to keep inflation in check, making it a key factor influencing lending rates across the board, including fixed-rate and adjustable-rate mortgages.

While adjustable-rate mortgages may also be influenced by inflation, they are not the only type affected. Overall, rising inflation tends to lead to higher interest rates for all lending products as lenders adjust to the macroeconomic environment.