By a majority of five to four, the Bank of England’s Monetary Policy Committee had elected to increase the interest rate, essentially the cost of borrowing, to 0.5% from 0.25%.
The interest rate doubling means this is the second time in three months that the rate has increased. The rate is close to reaching the mark of the start of the pandemic when the Bank cut the rate from 0.75% to 0.25% to address the financial issues implicated by the coronavirus. The rise evidently makes it more expensive to borrow which amasses from the December rise to quickly end the age of the extremely low rated mortgages for households.
The rise of property prices in the property market means the Bank is appearing to be taking a hold on inflation. The surge in property sales seen in 2021 was one of the highest levels since 2007 especially with schemes like the Help to Buy scheme allowing many to get onto the property ladder with the average sale price in London being shy of £520,000 in November 2021.
So how does rise in Interest rates impact the UK real estate market and mortgaged homeowners?
It, therefore, appears that the 0.5% rate designed to tame inflation led by increasing the cost of borrowing with the hope this would then dampen demand for mortgages and therefore reduce the number of people purchasing properties. Ultimately this could see prices deflate considering the UK average price for houses increased by 10.2% over the year to October 2021.
Reassuringly, brokers have predicted rise in mortgage rates be more measured and at a slower pace which in turn could mean that the low rates could stay for some time.
It is estimated that approximately 75% of borrowers in the UK real estate market are on the typical ‘fixed-rate’ schemes. Consequently, these fixed-rate mortgage holders will only see a change in mortgage repayments when the current term ends. Let’s not forget that is a good portion of the entire UK property market.
It is further estimated that around 850,000 property owners are on ‘tracker mortgages’, a type of variable rate mortgage, and over a million on the standard variable rates. Property owners on these tracker mortgage should see an imminent change in their monthly repayment amounts as these are more directly linked to interest rates. Those on the standard variable rates should see a change in due course as lenders adjust the borrowing rate, but it is the lender who decides by how much they increase the rate.
To put the impacts into perspective, typical standard variable rates mortgage customers may typically see an approximately £15 rise in repayments whilst those on the tracker mortgages around £25 rise in their repayments. The exact amount, of course, depends on the amount borrowed with these figures more being based on the more modest mortgage values side of things.
Consequently, there could be a squeeze on household budgets at a time of rising bills and when borrowers have been used to years of cheap borrowing. However, it could be argued that the cost of living will not quite dent the UK property market.
Is there anything I can do?
Provided you are on the typical fixed term mortgage, which let’s not forget accounts for around 75% of the UK real estate market, then this should not impact you until your deal ends.
For those on the standard variable rates, as discussed, it is more dependent on the individual lender. It could prove useful to check the terms and conditions of your mortgage offer document.
It does appear that the change in interest rate will take some time before impacting repayments. Therefore, it may be worth considering overpaying to take advantage of the low rates. This could entail some fees so it is always good to check with the lender but paying the fees could be worthwhile in the longer run. The same could be said to the other side of the scale as for savers who would like to benefit from the change in the rate rather than overpay, but again it may take some time before financial institutions pass on the change to rates.
It should also be noted that typical mortgage applicants in the stress testing process demonstrate the ability to pay at around a 6 or 7% rate proving that whilst there is an increase, it should not be insurmountable but more a prickly matter.
Overall, the rise in interest rates can be argued that it should not significantly impact the UK real estate market, particularly in the nearer future. It may be good to reaffirm that most of the mortgaged UK real estate market is on a fixed-rate basis so should not be felt by most until their current deal expires. Even those on the variable rates it is dependent on the lender, and it is anticipated there will be some time before impacting repayments.
As the mortgage application process tests the ability of the borrower to make repayments it could prove to be more uncomfortable on living expenses rather than impacting the borrower’s ability to make repayments.