The Bank of England has hiked interest rates by 0.5 percentage points – pushing the benchmark rate to 3.5% up from 3%. Soaring inflation in addition to surging energy costs and a severe cost-of-living crisis are significantly affecting prospective homebuyers and homeowners with mortgage deals that are set to expire will experience a rude awakening following this announcement.
Group Chairman of Cornerstone Tax, David Hannah, discusses the impact of the rise in interest rates on UK households:
“The announcement of today’s interest rate hike from the Bank of England will continue to add strain to homeowners. We are seeing a new level of unaffordable house prices in the UK property market, and the property market is now becoming increasingly difficult to enter for first-time buyers, and even though the average price of a property is falling, the increase in mortgage rates and the decrease in availability of mortgages are significant problems. We have faced a massive set of instabilities in the property market. We’ve had two years of the pandemic, necessary pandemic spending, we’ve had the war in Ukraine and that has increased inflation which has led to the massive increase in interest rates. Recent government policy in the UK has led to a devaluation in sterling and at least one if not two regime changes in the conservative party, and all of these factors have added to a sense of uncertainty of what’s going to happen in 2023.
“In early 2023 we will see slow demand. Only those people that are forced to sell will see a small fall in prices, however, over the whole of 2023, I expect to see low to mid to single-digit growth over the UK property market- between 5-8%. Despite the negative headlines we have been seeing, there is an underlying pressure on the market and that is leading to upward pressure on prices.
The affordability of mortgages has worsened and monthly payments soared following the mini-budget announcements, undoubtedly contributing to the fall we have seen in property prices in November. Despite the rising interest rates, I still see the main obstacle for first-time buyers being the ability to save enough money for a deposit. Renters will also feel the effects of today’s interest rate hike. They will find it more difficult to find available properties as landlords are set to experience higher mortgage rates which could deter them from renting their properties and look to sell instead. I think potential landlords will be more cautious when buying buy-to-let properties which will have a significant impact on the availability of homes in the UK.”
The announcement is set to further impact mortgage prices in the UK property market. When interest rates rise, about 1.6 million people on tracker and variable rate deals usually see an immediate increase in their monthly payments. The Bank of England has said that about four million UK households will face higher mortgage payments next year, with the typical payment up by £250 as the Bank’s Financial Stability Report shows that the average monthly mortgage bill is set to increase from £750 to £1,000. Adding to this, it was revealed from Nationwide that the average mortgage rose to 56% of earnings in the third quarter in London, with the national average reaching 34%. In response to today’s interest rate hike, a handful of mainstream mortgage lenders cut their rates by as much as 1.00 percentage point. The announcements made in the infamous mini-budget is continuing to affect the property market, pushing mortgage interest rates to 14-year highs – with the average two and five-year fixed rates climbing to 6.65% and 6.51% respectively but have since begun to fall. Mortgage rates have been rising continuously for months as central banks try to tackle rising inflation – currently standing at 10.7% in the UK.
Properties in the UK now stand at their most unaffordable level since 1899, with figures released by the ONS showing that the average home sold in England cost the equivalent of 8.5 times the average annual disposable income – which is the worst affordability ratio in England since records began in 1999. The average price of a property fell by 1.4% from October to £263,788, according to Nationwide. Earlier this month, the government’s official forecaster predicted that house prices will fall by 9% over the next two years, with affordability issues becoming a major issue.
