The Bank of England recently made headlines with its first interest rate rise in three years. This increase is now being passed on to people with variable-rate mortgages. It is also being factored into new fixed-rate products. What’s more, further increases are definitely a possibility. This raises the question of where the housing market goes from here.
A brief history of interest rates
Between July 2007 and August 2016, the UK’s base rate went down and down without a single increase. Over the course of nearly 10 years, it fell from 5.75% to 0.25%. The Bank of England finally raised the base rate again in November 2017, taking it from 0.25% to 0.5%. Their action received a lot of media attention.
In August 2018, the Bank of England raised the base rate again, taking it from 0.5% to 0.75%. It stayed at 0.75% until March 2020 when it was cut twice in quick succession. The first cut took it back to 0.25%. The second cut took it to 0.1%. It stayed there until December 2021 when the Bank of England moved it back up to 0.25%.
How the rate increase will impact existing mortgage holders
The effect of the rate increase is likely to come as a trickle rather than a flood. First, it will be passed on to people with variable-rate mortgages. Then it will feed through to people on fixed-rate mortgages as their fixed-term deals come to an end.
People on variable-rate mortgages who can remortgage now are still in a relatively strong position. Although they have missed out on the very best deals, interest rates are still low by historical standards.
People on fixed-rate mortgages will only feel the impact when their existing fixed-rate deal comes to an end. If that is soon, they may be able to remortgage now and protect themselves against potential increases. If it is further into the future, then they have breathing space. They can use this breathing space to build up equity and lower their loan-to-vehicle ratio.
How the rate increase will impact new buyers
The rate increase will be priced into mortgage products. It will therefore impact affordability. This could mean that some buyers move from just qualifying for mortgages to not qualifying for mortgages. Future rate increases could see the bar move even higher.
On the other hand, if rate increases slow (or stop) price inflation in the housing market, new buyers could actually benefit. A cooling in the housing market coupled with a strong job market could help wages to catch up with house prices.
How the rate increase will impact the housing market
Like all other markets, the housing market is driven by supply and demand. If demand remains high, then house prices should at least remain stable. They may even rise. If, however, demand reduces, then house prices will, at best, remain stable. They may even fall.
For practical purposes, “demand” means “demand from people who are willing and able to pay”. A rate increase may not impact people’s willingness to pay. As previously mentioned, however, it may impact their ability to pay.
With that said, interest rates are definitely not the only factor that impacts a person’s ability to afford a mortgage. Their income is also a factor as is the overall cost of living. This means that the potential direction of the housing market is likely to depend greatly on the UK’s economy. If it recovers quickly and grows, then it may carry on as usual.
In fact, over the long term, the decision to raise interest rates may turn out to be a blessing in disguise. If it cools inflation then everyone could end up with more disposable income regardless of whether or not they have a mortgage.
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