Mortgage holders, house hunters and savers will be affected by the Bank of England’s decision to increase the rate from 0.5% to 0.75%.
For homeowners with an 80% loan-to-value capital repayment mortgage over 25 years on a property valued at £280,000, for example, the rates increase means those on a typical two-year tracker mortgage deal could end up paying in the region of £27 a month more.
But looking ahead, there is growing concern that inflation could hit a staggering 8% by June, which would have an even greater impact on borrowers and savers, especially if interest rates rise further.
Property industry reaction:
Vanessa Hale, head of residential research & insights at Strutt & Parker, commented: “At the moment there’s such a huge demand for housing, the incremental interest rate rise is likely to have little impact in the short term on house price forecasts. Diverse packages previously offered by lenders have decreased in number with less choice now available for borrowers, but this is unlikely to have a dampening effect on a market still dominated by a disparity between supply and demand.
“The increase sits in line with expected rate rises for 2022, and in the short-term is not a surprise. Within the mainstream housing market, econometric measurements such as employment figures and a further loosening of Covid-19 restrictions point towards a robust spring market. However, interest rate increases and the increasing costs of living are both metrics that we will continue to closely monitor looking at 2022 more broadly.”
Dominic Agace, chief executive of leading estate agents Winkworth, said: “With inflationary pressures having increased, this rise was 100 per cent priced into the money markets and we saw mortgage rates move up on five-year fixes to allow for increased rate rise expectations.
“However, it’s interesting to note you can still get a five-year fixed rate at around 2.5%, guiding you through uncertainty as the global economy restarts post-pandemic and the dreadful war in Ukraine plays out.
“These are rates seen in March 2020 and represent near historic lows. Perhaps because of this, we have seen activity remain brisk, with applicants 80% ahead of the same week in 2019, even after this increase in borrowing costs of around one per cent last week. It is likely these rate rises will slow growth but with a buoyant labour market and shortage of supply, I would expect positive price growth to continue this year.”
Lucian Cook, head of residential research at Savills, commented: “In the short-term, we expect the imbalance between fairly resilient levels of demand and the shortage of available stock on the market to continue to be the overriding driver of house prices. At a headline level, we can see that the market is continuing in the same vein as the second half of last year; with agreed sales running at around 20% above normal pre-pandemic levels and the levels of new instructions at 8% below that benchmark.
“Relatively strong wage growth, together with high levels of fixed-rate borrowing and affordability stress testing at the point homeowners took on their mortgages, suggest projected interest rate rises won’t put existing borrowers under undue financial stress.
“The fact that expectations of interest rate rises have been brought forward is likely to act as a drag on the size of the mortgage they are comfortable with or can secure from their lender. And we would expect that to contribute to a slowing of price growth over the course of the year.
“But for the moment, the imbalance between resilient demand and very low levels of stock available will cushion any impact. The Bank of England has also launched its consultation on the relaxation of mortgage regulation, which could further mitigate the impact of further interest rate rises in the future.
“The prospect of further rate rises over the course of the year also points to a continued stratification of the market, with activity levels remaining more robust in higher price bands where more affluent buyers have more housing equity to fall back on.”
Nathan Emerson, CEO for Propertymark, said: “The housing market has emerged from the pandemic in a strong enough position to absorb much of the impact of the economic shocks that have been predicted for some time now.
“Even though interest rate rises have been widely predicted, our latest Housing Market Report data shows continued high demand from buyers with the number of sales being agreed at over asking price three times more than in a pre-pandemic market.
“It’s important to remember it remains relatively cheap to borrow money, and we expect that to continue to feed the appetite that there is for property as a good long-term investment.”
Jason Tebb, chief executive officer of OnTheMarket.com, remarked: “This latest interest rate rise was expected, given decades-high inflation, and we don’t expect it to quash the considerable buyer and seller sentiment in the housing market.
“Even with another quarter-point rise, interest rates remain low. The housing market is undeniably more stable than the hectic scenes witnessed last year but even as more stock becomes available, it’s not keeping pace with pent-up demand. New listings aren’t hanging around for long, with 61% of properties Sold Subject to Contract [SSTC] within 30 days of first being advertised for sale in February, according to our latest OnTheMarket Property Sentiment Index.
“The housing market is adjusting to a ‘new normal’, distinct from the pre-pandemic market; an elevated, faster-paced version where a large number of highly motivated buyers are keen to move quickly and eager to compete with other likeminded buyers for the small number of available properties. Modest increments in interest rates are unlikely to result in a slamming on of the brakes as buyers realise that if they aren’t organised and prepared to be decisive, they risk missing out in this highly competitive market.”
Simon Gammon, managing partner, Knight Frank Finance, said: “The Bank of England’s third consecutive rate hike ensures that we’ll continue to see lenders withdraw and reprice products on a daily basis.
“Mortgage rates that borrowers see today are noticeably higher than six months ago and in six months we would expect to see a similar increase. Often the repricing we’re seeing is by as little as 0.1% or 0.2%, but if that’s happening every other week then you start to see a steady upward trend.
“Five-year fixed rates were as low as 0.91% late last year, but now you’d be lucky to get them under 2%. You haven’t missed the boat, these rates are still very low by historic standards, but we do expect the upward trajectory of mortgage rates to endure for the foreseeable future.”
Iain McKenzie, CEO of The Guild of Property Professionals, commented: “The country is in the midst of a cost of living crisis, with the price of household bills and essential goods rising across the board.
“The Bank of England has increased interest rates to pre-pandemic levels in a bid to get inflation under control. This will come as unwelcome news to millions of people on tracker mortgages or variable rates that will feel another squeeze on their finances.
“Those on fixed-rate mortgages are safe for now, but consumers should keep an eye on interest rates in case their deal is up for renewal soon. Our research indicates that about 1.5 million fixed-rate mortgages are expected to end this year and next.
“All the latest figures continue to show that house prices are climbing across the UK, with strong demand in many areas driving this upward trend. Prices have increased 20% since the start of the pandemic and the industry has been expecting a readjustment for a while.
“It remains to be seen whether another interest rate rise will dampen the demand for properties and deter first-time buyers worried about mortgage payments. Prospective buyers will need to find a way of balancing their finances to afford the rising cost of living, if house price growth doesn’t cool down enough for their budget.”