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What does latest rise in interest rates mean for the UK housing market?

Key takeaways for you from the latest Bank of England interest rate increases

Originally posted: 9th May, 2022

Rise not predicted to cause any major impact on the housing market in short-term

The Bank of England has increased interest rates to 1%, but what does this mean for the UK housing market, homeowners and home movers?

Here are some key takeaways for you from the latest Bank of England interest rate increases:

Interest rates have risen again for the fourth time in only a matter of months, and this latest increase by the Bank of England from 0.75% to 1% will affect some mortgage holders and house hunters.

Interest rates remain low in historical context

The rise is not predicted to cause any major impact on the housing market in the short-term. The employment market is strong and interest rates remain low in an historical context (see the graph below which shows interest rate changes over the years, from January 20th, 1975 – May 5th, 2022, using Bank of England data).

Even with further rises in interest rates being predicted in order to steady the UK economy, as you can see from the chart, we are still looking at historical lows in terms of interest rates.

There is still a huge imbalance between housing supply and demand and the on-going low level of housing stock is set to continue to drive further price growth in the short-term.

After four successive rate rises, and rising living costs, we could see increased caution over the coming months which could mean a slow-down in the rate of price growth, which would help buyers.

Mortgage market

The rise in interest rates had been widely anticipated by the mortgage market and much of the increase has already been priced into any new fixed rate deals being offered by lenders. Also, because there is so much competition in the mortgage market, lenders have been reluctant to pass on recent increases in full to customers.

Inflation is predicted to continue to rise, and there are likely to be further hikes in interest rates, possibly to 1.5% or even higher in the months to come.

Homeowners and mortgages

Homeowners on fixed rate mortgages, which accounts for around three-quarters of homeowners, will not be impacted by the increases, but if you are on a variable rate mortgage, you will be affected and your monthly repayments will go up.

What should I do now?

Anyone with a fixed rate mortgage will not be impacted by the rise in interest rates so there is no need to do anything, but if you have a variable rate mortgage you should look at remortgaging to find a more competitive deal.

Also, it’s estimated that 1.5 million homeowners in the UK will reach the end of fixed rate mortgage deals this year, and will need to shop around for another deal, and you’ll likely find that the rates for new deals are higher than when you last remortgaged. You’ve also got to consider that your home is likely to have increased in value from the last time you remortgaged and you will have repaid some of your load, and therefore you are likely to qualify for a competitive mortgage rate.

There are options to consider to reduce monthly payments, such as extending your mortgage term, but this will mean you pay more interest over the life of your mortgage.

When you look at a new fixed rate mortgage, you will also need to decide if you want to remortgage on a two-year or a five-year deal.

Need mortgage advice?

If you need help with a mortgage, or remortgaging, whether you are a homeowner, home-mover, first-time buyer, looking for a Help to Buy or Buy-to-let mortgage, or need general mortgage advice, Preston Baker Financial Services can assist you.

We will advise you on the most suitable mortgage for you from our extensive panel of lenders.

James Kear, Preston Baker’s Head of Financial Services, said: “Now is the right time to assess your mortgage and protection needs. At Preston Baker Financial Services we are on hand to find the most cost-effective mortgage and protection solution available to you.

“We are saving clients significant amounts of money whilst locking monthly payments down now to protect their future.”

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Interest rate changes over the years

The chart below shows interest rate changes over the years, from January 20th, 1975 – May 5th, 2022, using Bank of England data.

Even with further rises in interest rates being predicted in order to steady the UK economy, as you can see from the chart, we are still looking at historical lows in terms of interest rates.

Chart