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How will the rising Bank of England rate impact the UK property market?

James Quinn, founder of GB Home Surveys, looks at the measures the Bank of England has taken to tame inflation and its effect on the property market.

It is undeniable that the last 12 months have been incredibly difficult for families and businesses across the UK. From soaring energy food prices brought by the ongoing conflict in Ukraine, to the aftereffects of the UK’s departure from the European Union, not to mention former Prime Minister Liz Truss’ disastrous mini-budget, many recent events have spawned significant volatility in the national economy.

This instability has, in turn, caused inflation to shoot up considerably, and it currently stands at approximately 10%. As such, on Thursday 2nd February, the Bank of England announced that it was raising its interest rate by 0.5 percentage points to reach 4%, explaining that this was the best solution for bringing inflation back under control.

While the increase will likely be welcomed by savers, who will experience a healthy boost to their bank balance as a result, it means others will face higher borrowing costs, making an already challenging financial situation even harder for many people.

With economists forecasting that rates will increase further in 2023 – with a potential rise set to be made on 23rd March – it is understandable why many are concerned about the potential impact that high-interest rates will have on the UK’s property market. So far, however, the market has proven itself to be far more buoyant than many had expected it to be.

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Confidence and competition

When the BOE was forced to hike interest rates to 3.5% in the latter stages of 2022, this naturally fed through to mortgage rates as well, making it considerably harder for first-time buyers to secure the funds needed to purchase a home. While the situation was already gloomy for borrowers at this point, Liz Truss’ now infamous mini-budget made things even worse, ramping the level of volatility up to unexpected new heights.

In the wake of the mini-budget, mortgage providers pulled nearly 1,000 products from sale, leading to a significant rise in the cost of a mortgage. Despite this, in the early stages of 2023, it appears that inflation may now have peaked, which is helping to build confidence in the financial markets.

This is highly encouraging for the mortgage market. Confidence means lenders are willing to lend, and borrowers have access to the products that they need as a result. Considering the hole that the mini budget left in lenders’ mortgage books, it is surprisingly positive that lenders are now lending on fixed-rate mortgages below the BoE base rate for the first time in a long time. With more and more lenders starting to do this all the time, a healthy level of competition has resumed in the market, which is advantageous for borrowers who have a wide range of products to choose from.

Property prices remain high

In addition to the signs of positive activity for the benefit of prospective buyers, high-interest rates are also proving advantageous to many homeowners.

The UK property market has long been marked by supply and demand issues, with the number of people looking to get on or move up the housing ladder far outstripping the number of homes available.

This has already kept property prices high and, as of November 2022, the average house price in the UK stands at £294,910, which is a 10.3% rise from the previous year. With interest rates now having risen to 4% as well, it is unlikely that there will be a significant drop in house prices or value any time soon – particularly with experts predicting a lower peak in the BOE rate at 4.5%.

While average house prices have come down a little, they have not fallen as far as many had first anticipated they would. In fact, in some parts of the country, such as the East Midlands and the North West, prices have actually risen slightly. With supply and demand issues persisting – given that the UK is not building homes quickly enough – and interest rates proving better than expected, house prices may not actually decrease by as much as some are predicting.

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Things are looking up

While inflation remains high, the BOE is anticipating that it will fall over the course of 2023, as wholesale energy prices continue to drop. As such, the rate of inflation is not likely to reach the level that many had feared it would. This is not only positive news for businesses and households who have been hit by hefty bills and day-to-day expenses in recent months, but also for the stability of the UK’s property market.

Given the renewed confidence in the financial markets, the healthy level of competition in the mortgage market, and the fact that house prices remain steady across the country, the outlook for the property market is fundamentally positive despite rising interest rates, which is itself a positive signal for the UK’s economy as a whole.

By JAMES QUINN

Source: Property Reporter

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Where does the housing market stand with a 3% base rate?

With constant increases in the Bank of England base rate, mortgage rates have been hitting the headlines with regularity.

While rates have risen, housing market sentiment has fallen. A record half (52 per cent) of adults across Britain disagreed it was a good time to buy a property, according to a September survey by the Building Societies Association.

So where does this leave first-time buyers, and those looking to remortgage?

Mark Harris, chief executive of SPF Private Clients, says that for first-time buyers it is arguably as good a time as any to buy, if they have found a home they want to purchase, are happy with the price they are paying, can afford to pay it and are prepared to stay put for a few years.

“Buyers will be aware that there is talk of property prices falling and potential negative equity for first-time buyers in particular because they tend to take on higher loan-to-value mortgages.

“But such issues are only really a problem if the buyer intends to sell again in the short term. Over time, prices tend to appreciate in value and usually recover even if they dip initially.”

Richard Howes, director of mortgages at Paradigm Mortgage Services, says first-time buyers could take advantage of any fall in house prices, but adds: “It’s the issue of affordability coupled with the cost of living increases that could really impinge on their ability to buy.”

With falling house prices widely predicted across the market, Simon Gammon, managing partner of Knight Frank Finance, says it is reasonable to expect lenders to be hesitant about offering competitive high LTV mortgages.

“We have already seen a reduction in the number of 90 per cent and 95 per cent mortgages available, and those that are still available come at a significant premium in terms of rate. We can therefore expect it to be harder for first-time buyers to get onto the property ladder in the foreseeable future.”

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Just Mortgages national director Carl Parker says it is without doubt becoming more challenging for both first-time buyers and those looking to remortgage after a low fixed rate.

“This is just because rates have risen so quickly, making it hard for people to adjust. However, swap rates are starting to fall back and therefore mortgage rates are dropping a little too. However, they are unlikely to ever return to the historic lows of the past 10 years.”

Vikki Jefferies, proposition director at Primis Mortgage Network, also points to fixed rates stabilising despite the 0.75 percentage point increase in bank rate. But she agrees that borrowers reaching the end of a fixed rate will be faced with higher rates than they are used to.

“This may come as quite a shock for some, especially with house prices falling and reductions in loan-to-value ratios. As a result, product transfer could prove to be a better option for some as customer loyalty can be considered, which sometimes includes preferential rates.

“With fixed rate mortgages currently seeing higher rates than standard variable rate mortgages, talking through the options available to clients is now more important than ever.”

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Indeed, Harris at SPF Private Clients says many clients are seeking variable or tracker rates with no early repayment charges to remortgage. “These are comparatively so much cheaper, at least initially than a fixed rate.

“[Clients] plan to move onto a fixed rate, once pricing of these falls. Meanwhile, if interest rates don’t rise as fast or as far as previously predicted, a variable rate mortgage may turn out to be a good option.”

When it comes to house prices meanwhile, Howes at Paradigm Mortgage Services cites expectations of price growth to slow, rather than prices to fall. “With the recent surge in prices since Covid, most homeowners will have equity they can utilise.

“Indeed, the average LTV of the top five lenders is 60 per cent and they cover around 72 per cent of all lending in the UK, so the average person looking to remortgage should be okay.

“What is of concern though is that remortgage affordability could be an issue, and of course the conveyancing market with its delays and current timescales makes it less attractive than perhaps doing a further advance and product transfer.

“This area could be an issue for advisers, where the DIY product transfer could come into play, at a time when advisers are needed more than ever.”

Parker at Just Mortgages agrees that the need for mortgage advice is at its peak. “The daily fluctuation in mortgage rates has made the role of brokers absolutely vital to help borrowers assess their affordability against changing criteria, and navigate options in this mortgage landscape.

“It is also essential that brokers make the time to reach out to existing clients, to see what help and advice they need, and help to put their minds at rest during this changing interest rate environment.”

By Chloe Cheung

Source: FT Adviser