Rising interest rates… What does that mean for the property market?

Published: 23/06/2023 By Weronika Zolnierzak

                                                                  Rising interest rates… What does that mean for the property market?

In a move that doesn't come as a surprise to many, the Bank of England has once again increased interest rates, marking the 13th consecutive rise since December 2021. This time, the increase is a substantial 0.5 percentage points, bringing the base rate to 5%. The decision has left many homeowners and potential buyers wondering about the impact it will have on their finances.

For existing homeowners with variable rate mortgages, the rise in interest rates means an increase in their monthly mortgage repayments. As the base rate goes up, lenders adjust their rates accordingly, resulting in higher borrowing costs for homeowners. This additional financial burden could put a strain on households already grappling with rising living costs and other expenses.

Those with fixed-rate mortgages, on the other hand, may not be immediately affected by the increase. Fixed-rate mortgages offer stability as the interest rate remains the same for a specified period, typically two to five years. However, when the fixed-rate term ends, borrowers may have to renegotiate their mortgage terms, and by then, the prevailing interest rates may be significantly higher.

The increased cost of borrowing may also impact the affordability assessments conducted by lenders. When applying for a mortgage, lenders evaluate an individual's ability to repay the loan, taking into account factors such as income, expenses, and interest rates. With higher rates, lenders may tighten their lending criteria, making it more difficult for some individuals to secure a mortgage or forcing them to borrow a smaller amount. This opens the market to many cash buyers as many people will not be able to secure a good deal due to mortgage rates.However, it's not all doom and gloom! Rising interest rates are often a response to an improving economy. The Bank of England's decision to raise rates indicates their efforts to control inflation and ensure the economy remains stable in the long run. By curbing inflation, the central bank aims to maintain the purchasing power of the currency and avoid economic overheating. Therefore it makes the UK a safe territory to invest as it is likely that the economy will improve in the next years to come, so it might be a good time to buy before the house prices go up.

Moreover, higher interest rates can benefit savers. As rates rise, savings accounts and other financial products become more attractive, offering better returns. This can encourage individuals to save more, which is essential for long-term financial stability and achieving personal financial goals.In conclusion, the Bank of England's decision to raise interest rates once again has significant implications for homeowners and potential buyers in the UK. Existing homeowners with variable rate mortgages will face increased monthly repayments, while prospective buyers may find it more challenging to enter the market due to higher borrowing costs. However, these rate hikes are implemented with the aim of maintaining economic stability and controlling inflation. It is crucial for individuals to carefully assess their financial situation and seek advice from professionals to navigate these changing conditions effectively.