The Bank of England has just announced its latest mortgage interest rate increase for UK homeowners. In December 2021, the rate was set at just 0.1 per cent, but this month it reached 5.25 per cent: the highest level seen since the 2008 financial crash.
So what does this mean for your mortgage and for house prices in your area?
Why are current mortgage interest rates in the UK so high?
If you’ve been shopping lately, you’ll be aware that the cost of food and household goods has skyrocketed, pushing up inflation figures. The war in Ukraine, post-pandemic supply issues, poor harvests and red tape arising from Brexit have all combined to increase prices. As a result, the government has been attempting to bring inflation down by raising interest rates.
The theory goes that when borrowing costs rise, consumers will spend less, bringing prices down. But unfortunately, this creates financial headaches for anyone paying off a mortgage. For example, a homebuyer who took out a £200,000 loan using a 2% fixed-rate, 25-year mortgage two years ago, will have been paying £848 a month. Today, at the best deal rate of 5.5%, they will need to pay £1,278 a month.
There’s no way to tell when interest rates will head downwards, as that will depend on a sustained reduction in inflation figures. Fortunately, inflation has already fallen to 7.9 per cent in the year to June (down from 8.7 per cent in May), and the Bank of England expects it will continue to fall.
When inflation finally reaches a more acceptable level, the Bank will likely wait a few months to see that figures remain steady before it begins reducing interest rates.
How will UK home loan interest rates affect my mortgage?
If you have a fixed-term mortgage with months or years still to run, the current rate rise won’t affect you at this time. However, when your agreed term ends, you could be facing a big increase in the monthly amount you will have to pay for your mortgage. Conversely, borrowers who chose a standard variable-rate or tracker mortgage are being affected right now.
Have you been negatively affected by interest rates going up? Then you may want to extend your mortgage term or change your mortgage to an interest-only deal. The Citizens Advice Bureau has advice on what to do if you can’t pay your mortgage, or alternatively, you could contact a mortgage broker to discuss your options.
What’s the situation for first-time buyers?
First-time buyers have also been badly affected by interest rate rises. Higher mortgage costs, matched with the cost of living squeeze, make it even harder to take that first step onto the property ladder.
If you depend on a mortgage to buy your first home, you should ensure that the product you choose matches your financial situation. One way to judge your ability to support a mortgage is to compare the cost of renting with the cost of monthly mortgage payments (but don’t forget to budget for moving costs and any future repair and maintenance expenditures).
Don’t feel too discouraged if you have set your heart on buying your own home. Lenders are working hard to offer incentives to new borrowers, and it should be possible to find a property and a mortgage deal to suit your circumstances.
How are rising interest rates affecting house prices?
In July, UK property data showed that house prices dropped by 2.4 per cent on an annual basis. The south east of England has seen the biggest falls in value, with £15,000 stripped off the value of an average home in the region, making prices more affordable for buyers.
Although average prices have now fallen for the fourth month in a row, Halifax says that the housing market is showing “resilience in the face of tough economic headwinds”.
Can we expect a crash?
House prices will continue to edge down over the rest of this year and next, but it’s encouraging to see that the rate at which values are falling is gradually easing off. Experts currently believe that a property crash is unlikely.
Economists are predicting that wage growth will outstrip inflation figures this year. This is good news that could bring an end to the cost of living crisis. It could also ease finances for over-stretched homeowners and result in a faster recovery for the property market.
As long-established Barkingside and Ilford estate agents, we understand the financial pressures local people are facing. It’s our aim to support clients through today’s financial challenges, so we are always happy to chat through your home buying options or refer you to reputable mortgage advisors in your area.
Simply get in touch to chat with one of our friendly sales advisors.
Give us a call at 0203 972 7341 or email info@oaklandestates.co.uk.
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