Not a moment too soon either, as the Bank of England has confirmed that rates will increase to 4 percent from 3.5 percent and will continue to rise. This will significantly impact the UK property market as higher borrowing costs will make mortgages more expensive. Still, it could dampen demand and soften price growth in some parts of the country. As such, investors and homebuyers should note any changes that this might have on the market as a whole. With that in mind, let’s take a closer look at how rising interest rates could impact the property market in the UK.
What is a rise in interest rates?
When a bank lends you money, they charge you interest for the privilege. This amount of interest is affected by many things, including how much it costs the bank to lend you the money and what assets they have to offer as collateral to secure the loan. Higher interest rates mean banks are charging more for these services and generally making less profit. Higher interest rates also influence the price of assets, like homes and shares, as they are used to determine the amount you will pay for them. A simple way to figure out your interest rates is to talk to professionals such as estate agents in Berkhamsted.
Rising interest rates may have a positive or negative impact on the market, depending on the circumstances.
How will rising interest rates affect mortgages?
Mortgage costs are likely to rise as banks pass on the extra cost to customers. In the wake of another rise in interest rates, UK Finance anticipates that 715,000 borrowers on tracker mortgages will experience difficulties. And based on the bank’s announcement, householders are expected to pay an extra £588 a year on average.
This could dampen demand and slow house price growth in some parts of the country. However, a growing number of economists are predicting that the effects of higher interest rates may mute in major cities, where demand for housing is high and prices are high as a result.
Demand for housing may be dampened
A rise in interest rates is likely to make mortgage payments more expensive for both first and second-mortgage borrowers. Higher rates may also affect house prices in some parts of the UK, as the higher mortgage cost could dampen demand. However, most economists are predicting a muted impact on the UK’s housing market, as rising interest rates do not heavily impact most borrowers. And rising interest rates are more likely to slow growth than to cause a significant collapse.
Price growth could slow down
If interest rates rise, the amount banks make on mortgages will eventually fall. As a result, house prices may fall in some areas as fewer people are able to buy. This would have a dampening effect on the country’s economy, as it would make it quite challenging for the property market to create more jobs and fuel growth.
Investor activity could decline
As discussed earlier, higher interest rates are likely to make mortgages more expensive for first and second-mortgage borrowers alike. As a result, fewer people may be able to afford to buy an investment property or take on a share. This may have a negative impact on the UK’s economy. But most economists believe that, even though rates will rise over the course of the next few years, the increase may not be substantial enough to significantly dampen investor activity in the UK property market.
The experts take
According to Nationwide’s chief economist, Robert Gardner, “There are some encouraging signs that mortgage rates are normalising, but it is too early to tell whether activity in the housing market has started to recover.
The fall in house purchase approvals in December reported by the Bank of England largely reflects the sharp decline in mortgage applications following the mini-budget. It will be hard for the market to regain much momentum in the near term as economic headwinds are set to remain strong, with real earnings likely to fall further and the labour market widely projected to weaken as the economy shrinks.”
Pantheon Macroeconomics’ senior UK economist, Gabriella Dickens said, “Nationwide’s data show that house prices are continuing to buckle under the pressure of elevated mortgage rates, squeezed real incomes and weak consumers’ confidence.”
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