Interest Rate Increase: Bad News For Buyers?

Bank Of England Increases Interest Rates To A Record High 

The Bank of England raised interest rates by 0.25% on Thursday, 16th June. At 1%, interest rates were already the highest in 13 years. 1.25% is the highest interest rate since 2009.

Why Are Interest Rates Increasing?

The Bank of England’s decision to raise interest rates aims to help slow inflation.  In April, consumer price inflation hit 9%, while retail prices jumped to 11.1%. This is the highest inflation has been in 40 years, which is why the Bank of England is rushing to make a move against it. 

Why Has Inflation Increased Recently?

Inflation is down to the rising prices of products and living. In the UK, inflation has boomed over the past year. There are several reasons for this.  One of the most significant factors has been the fuel prices. This was triggered by a variety of factors, including the depreciation of the pound after Brexit, and has been exacerbated by the conflict in Ukraine. These higher fuel costs have contributed to higher prices for goods and services.  Costs of raw materials for goods have also increased dramatically due to the combination of Brexit and the COVID-19 pandemic. Brexit has also led to rising import prices and a decrease in workers in all sectors. All these factors have raised product prices across the board, driving inflation.

How Can The Bank Of England Slow Inflation By Increasing Interest Rates?

The Bank of England’s aim is to slow inflation by making borrowing more expensive, thus limiting consumers’ purchasing power. This will lead to a nationwide cut back on spending, which will in turn reduce the demand for goods and services. Lower demand will help to bring prices down, thus limiting the effects of recent inflation. However, it may take some time for the full effects of this plan to be felt, and in the meantime, the increased cost of borrowing could significantly affect those already struggling to make ends meet.

Who Will Be Affected?

Those with a loan or mortgage that charges a variable interest rate will find that their repayment costs increase.  However, many homeowners choose a fixed-rate mortgage, meaning that this will not affect them. UK buyers opting for five-year fixed rates have increased from less than 30% of borrowers in  2017 to around 45% in 2021.  This means that fewer homeowners with outstanding loans are likely to see a change in rates, avoiding being hit by this interest rate increase. For first-time buyers, this increase could be daunting. Increasing interest rates may deter buyers from choosing a new mortgage and choosing to keep renting rather than buying a new property.

How Is The Increase Affecting Mortgage Rates?

Before the Bank of England confirmed the increase in interest rates last Thursday, interest rates for fixed-term mortgages had been increasing.  According to Moneyfacts, the average interest rate for a two-year fixed-term mortgage at the beginning of December was 2.34%. This has since shot up to 3.25%.  The average rate of 2.64% for a longer fixed-term mortgage has increased to 3.37%.  The lowest fixed term rate available has also increased. In December, it was 1.29% for a 20% deposit, which is now 1.7%.  However, long-term mortgage rates are incredibly competitive at the moment. Following the overall increase in interest rates, there is just a 0.45% difference in interest rates between a 2-year fixed-rate mortgage and a 10-year fix.

What Does This Mean For The Housing Market?

Property experts have suggested that increased interest rates and the general media focus on the current period of relative economic insecurity in the UK could significantly impact the UK property market. 

A Gloomy Forecast For The Property Market?

When interest rates rise, it becomes more expensive to borrow money. This is usually bad news for those who are trying to buy property, as they may find it harder to secure a mortgage. Furthermore, as the increase in interest rates means that potential buyers have reduced disposable income and face stiffer lending criteria, buyer demand is decreasing. House prices have also remained high throughout 2021 and early 2022, deterring many buyers.

Decreasing House Prices?

This gloomy outlook is expected to change.  House prices have been predicted to fall over the course of the remaining months of 2022 since their current rate is considered ‘unsustainable’ by experts. Furthermore, house prices will be forced to decrease as buyer demand decreases.  There is even the possibility of an increased home supply, as construction picks up post-pandemic and property developers see the increased demand for homes. This would further reduce property prices, making now a good time to consider buying. 

Renting Vs Buying

Experts have suggested that the increase in interest rates will push up rent, as landlords pass on their own higher costs.  If and when this will happen is subject to individual rental contracts but could make the decision between buying and continuing to rent even harder for potential first-time buyers.  However, if property prices do drop, this could be a great opportunity to take advantage of lower property prices and avoid the overall increase in costs of living. 

Can I Find A Good Deal On A New Home Even After Increased Interest Rates?

The UK’s recent decision to increase interest rates will make it harder to borrow money and could therefore make it more difficult for people to buy property.  However, this doesn’t mean it’s impossible to find a good deal on a property. Rather, the current economic climate may even stimulate a decrease in property prices and an increase in home supply. If you’re looking to buy a new home at a good price, look no further than Getting on the Ladder. We list high-quality properties by leading developers at excellent prices. For a great new home deal, check out our listings.

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