Central banks have responded to a global surge in inflation by raising interest rates. To bring inflation back down towards its 2% target, the Bank of England raised base rates to 1.75% in August, the highest figure since 2008. Further rate rises, which are expected over the coming months, will put even more pressure on households who have borrowed money during a cost of living crunch.
Here, we look at what this means for those re-mortgaging at present, and also how rising rates will impact household finances.
Mortgage Repayments
While 54% of homeowners own their property outright, the rising rates will be a tough pill to swallow for the 7.2m households who own their home with a mortgage. The latest interest rate rise means that the average buyer in Great Britain will now need to earn an extra £10k a year in order to borrow the same amount of money as they did this time last year for a home.
The impact of rising mortgage rates is likely to be felt most keenly in 2023, when mortgages will become noticeably more expensive. Around 40% of fixed-rate deals are due to end in the next year, many of whom will be facing higher monthly repayments. Depending on when borrowers secured their current deal, they’re likely to see mortgage repayments rise by 10-30%.
House Prices
Despite mounting financial pressure on households, house prices have continued their upward path this year. The latest data from the ONS shows that house prices rose 7.8% across Great Britain in June.
Price growth has been underpinned by the lack of stock in the market, which continues to fuel competition amongst buyers. In August, the average Hamptons seller achieved 99.2% of their asking price, a slight dip from the record 100.2% set in May. The lack of stock means that buyers are still prepared to pay closer to the asking price than pre-Covid times when asking to achieved averaged 96.5% in August 2019.
However, rising interest rates will begin to limit the amount of money buyers can afford to borrow. This is one of the main reasons why we think house price growth will slow over the next year.
First-time buyers are likely to be hardest hit. Higher interest rates will reduce the amount they can borrow, while spiralling inflation will erode their ability to save for a deposit. This means that they’re likely to rent for longer.
On the other hand, higher mortgage rates will also propel cash buyers to the front of the queue, meaning prime markets are likely to remain most resilient. We also think that more downsizers, many of whom have paid off their mortgage, are likely to move this year to save on energy bills.
Interest Rates and Renting
While rising interest rates are set to dampen house price growth, they are likely to have the opposite effect on rents. For mortgaged landlords, rising interest rates will be a blow to those operating in areas with low rental yields, as more of their income will be swallowed by higher mortgage payments. These landlords will be seeking to pass on higher borrowing costs onto tenants, and others may opt not to add to their portfolios or quit the business.
Especially in London, the supply of rental homes seems set to shrink further, pushing up rents. Hamptons research (link) predicts that rents will increase by 6% in 2022, and 5% in 2023 and 2024.
