Social Research ¦ Market Research ¦ Behavioural Insight ¦ Evaluation ¦ SROI
Social Research ¦ Market Research ¦ Behavioural Insight ¦ Evaluation ¦ SROI
Interest rates have reached their highest level in 15 years as the Bank of England tackles inflation. On June 22, the base rate rose by half a point, from 4.5% to 5%, affecting mortgage repayments and lending deals.
Inflation stood at 8.7% in May, well above the Bank’s target of 2% annually. One of the reasons for high inflation is the release of savings accumulated during lockdowns, coupled with wage increases. Higher interest rates aim to reduce inflation by reducing disposable income for those with mortgages.
Although it is expected that rates will decrease with positive inflation news, another rate hike remains a possibility. Governor of the Bank of England, Andrew Bailey, anticipates a significant drop in inflation as energy prices fall. Despite the better-than-expected economic performance, Bailey believes inflation is still too high and warns that not raising rates now could lead to worse consequences later. This latest increase marks the 13th consecutive rate hike since December 2021.
The impact on mortgage homeowners will be felt gradually due to the large number of people on fixed-rate mortgages. However, approximately 800,000 fixed-rate mortgages will end by the end of this year, with a further 1.6 million ending by December 2024. Those affected will face higher remortgage costs and potentially see their monthly payments double. Over 1.4 million people on tracker and variable rate deals will experience immediate payment increases. The average two-year fixed rate residential mortgage currently stands at 6.23%, and the five-year fixed rate is 5.82%.
The rate rise will particularly affect those with larger mortgages, especially a small group on variable rates. The government has ruled out assistance for individuals struggling with higher payments, citing potential counterproductivity and inflationary effects. Their aim is to combat inflation to keep costs and interest rates low in the long term.
The housing market growth in the UK is expected to slow down due to the combination of rising living costs and the interest rate increase. However, small-to-medium-sized towns surrounding cities, such as Saffron Waldon, East Grinsted, Honiton, and Eastleigh, are experiencing around 5% growth in prices this year, counteracting the trend observed in rural areas from 2019 to 2022. The Bank of England’s actions to control inflation will determine the market’s future.
Millions of borrowers with variable, tracker, or short-term fixed-rate mortgages will face significant monthly increases in their mortgage payments, affecting approximately eight million households. Some borrowers on the brink may have to extend their mortgage term or even sell their homes. First-time buyers will face even greater difficulty obtaining a mortgage without a substantial deposit, especially considering recent house price increases.
Renters will experience higher rents due to landlords grappling with increased mortgage costs. The National Residential Landlords Association warns that rising expenses and regulations may lead many landlords to sell their properties, reducing the number of houses available for rent.
The rate rise is expected to lead to a decline in new housing development starts. Developers will face higher borrowing costs, resulting in slower construction. Property developer Ben Woolman calls for planning system reform to increase the supply of new homes, making homeownership more attainable for those currently priced out of the market.
Economist Jonathan Davis predicts a drop in house prices, anticipating a fall of 10-20% from the peak in 2022 by next year. Capital Economics expects a 25% decrease in house sales this year, with prices potentially falling by a further 12% or even 25% if mortgage rates remain high for an extended period. Investors may leave the housing market for more attractive alternatives like bonds, further cooling prices.
Considering the predicted rise in interest rates, mortgage expert Claire Flynn suggests that property values may continue to fall, potentially by 6-7% by the end of the year, depending on the area. Researching mortgage options and seeking advice from brokers is crucial in this high-rate environment.
Higher mortgage rates are likely to make borrowing more expensive, slowing down the housing market and putting downward pressure on prices. However, the shortage of houses for sale may prevent significant price drops, especially in sought-after areas. The interest in viewing homes remains high, and people are reassessing their borrowing capabilities. The Bank of England’s decisions on interest rates, influenced by inflation, will ultimately shape the housing market’s future.
