The impact of the interest rate rise on the property market

Following a decision made by the Bank of England’s Monetary Policy Committee last week, interest rates grew for the first time in a decade, rising by 0.25% up to 0.5%. Marking the first increase since July 2007, the aim of the rise is to reduce the rate of inflation which has been largely attributed the UK’s decision to leave the European Union. But what affect does the interest rate rise have on the property market?

According to many property experts, the rise is expected to have little impact. The general reaction across the industry suggests the market was ready for the rise and is robust enough to deal with it.

Those paying fixed monthly payments are unlikely to feel an immediate impact, however there’s no denying that the increase will have affected those on variable rate mortgages which generally move with the official bank rate. But, Bank of England governor, Mark Carney, said that British households have been “savvy” with their finances and have mostly taken out fixed-rate mortgages, which means it will take some time before the rise has an impact on them.

According to the bank, of the 8.1 million households with a mortgage, less than half (3.7 million households) are on either a standard variable rate or a tracker rate. With an average outstanding balance of £89,000, payments will have increased for these mortgage holders by about £12 a month, according to UK Finance. (1)

Economists said the rise was unlikely to have a big effect on the economy, because rates are still at the lows seen since the financial crisis. Doug Crawford, CEO of My Home Move comments, “Although this is the first rate rise by the Bank of England in a decade, mortgage holders should be encouraged to remember that 0.5% is still a historically low rate and is simply a return to the rate that was in place in July 2016. For people saving for a deposit to purchase a home, the rate rise should be welcomed news, as they should see a slightly better return on their savings.

“For the housing market, the developments and risk controls that Lenders have in place will continue to protect investment in housing and ensure that the market remains stable for the foreseeable future.”

Following the base rate increase announcement, Halifax released a report highlighting the strength in the market with house prices rising across the UK.

In the year to October, prices rose by 4.5%, up from 4% in September and the fastest rise since February. This brings the average price of a UK house to a new record high of £225,826. Halifax also predicted this trend will continue in the months ahead, supported by reasonable mortgage deals and high employment.

It said that last week’s rise in base rates was unlikely to dampen the market and Russell Galley, managing director of Halifax Community Bank commented, “We do not anticipate the base rate rise will be a barrier to buying a house.” (3)

Andrew Ellinas, Director (London) for Sandfords Estate Agents believes the 0.25% rise may not have a significant impact on the economy as a whole, but suggests that it could further depress the falling property market in prime central London. However he believes that the abolishment of stamp duty could revitalise the “flat” market in London, “London is the driving force for every market and scrapping this tax would provide buyers with an incentive to start moving again.” (4)

In contrast, some property experts have suggested that the rise could in fact benefit the property market. Guy Gittens from Chestertons Estate Agents comments, “The very small increase in the Bank of England base rate is actually good news for the housing market. The knock-on effect will most likely be that Sterling value will increase, potentially demonstrating that we are in a stronger position today than we have been in recent times and giving added confidence to overseas buyers currently looking at opportunities in within the UK.”

Final word

Whilst opinions appear to be split, it does seem that the recently rise in base rates is unlikely to have a significant impact on the property market. However, with financial markets indicating two more interest rate increases over the next three years, taking the official rate to 1%, mortgage experts are advising home owners to review their mortgage deals and still to consider remortgaging now, before the rates increase again.

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