The interest rate rises & what this means for homebuyers

June 23, 2022

Following the recent interest rates update from the Bank of England and the ongoing pressures in the economy, we wanted to give you some insight into what is going on in the housing market and provide you with the information you need to help ease any anxieties that you may be experiencing.

Inflation and Interest Rates
It’s a scary subject so let’s get it out of the way first and foremost. The cost of living crisis is affecting everything and nearly everyone. From filling up your car, to doing the grocery shopping and of course household bills.

Some of this is due to conflicts happening around the world – notably the Russia/Ukraine war which has seen Russia being shut out of the economy with oil and gas exports driving up the price of imports from elsewhere and seeing our average bills go up as much as 200%.

Another factor is that after a global pandemic there was a surge in demand from consumer spending with a lack of supply, and in return it saw prices inflate.

A weak pound on the markets makes buying goods more expensive and then there are of course factors like Brexit making it harder for UK businesses to absorb higher import costs and get items into the country. All of this raises prices and adds to the inflation issues we are seeing today.

We are not also forgetting about the recent hikes in taxes either…

So why does raising the interest rate help to curb inflation?

The common economic theory is that if you can make people spend less money in the market – because borrowing becomes more expensive – then you can help to curb inflation. You will eventually see supply and demand leveling off with the hope that you don’t have more supply than demand in order to help the economy grow.

Historical Lows
Let’s be clear, a 1.25% interest rate (as updated in June 2022 by the BOE) is the highest the interest rate has been in 13 years.

To put this into perspective, in July 2007, the interest rate was 5.75% and in October 2009 it was 0.5%. These are pretty random dates however, if you look more closely at what was happening in this time period, we can see that in the financial crisis of September 2008, governments had to respond to what would have been a catastrophic scenario for homeowners.

In fact, the crisis in 2008 was the Subprime mortgage crisis and it’s different to today. Central banks are better positioned to deal with this kind of emergency, learning the hard lessons from then.

Today’s issue is more to do with general economic conditions and whilst we have seen rises in the last 5 months – we should expect to see more in the coming months as well. (A worst case scenario is that we hit 3% in the coming 12 months)

If we were to take a conservative view and look at what other countries are doing – in particular the FED in America – a rate increase of 0.5% may not be too far off. This would definitely push up the cost of borrowing with the idea that people really cooled their spending habits in order to bring inflation down.

It’s important to remember that we have been living in a historically low interest rate period for the last decade which has seen economic growth around the world increase for many nations. However, macroeconomic factors, a global health crisis and a global surge in demand for products and services have curtailed that growth and it’s right that governments find adequate responses.

Interest rates are one of the more suitable options that central banks can impose to help curb inflation whilst governments search for answers in other areas.

Fixed & Variable Mortgages
The type of mortgage you have, or choose for when you buy your next home is going to make a difference to your monthly spending.

A fixed mortgage is “a home loan with a fixed interest rate for the entire term of the loan. Once locked in, the interest rate does not fluctuate with market conditions. Borrowers who want predictability and/or who tend to hold property for the long term tend to prefer fixed-rate mortgages.”

A variable-rate mortgage, adjustable-rate mortgage, or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. The loan may be offered at the lender’s standard variable rate/base rate.

If you were looking for certainty, getting a fixed rate mortgage today is going to be one of the most sensible options – especially if you are the kind of person who is adverse to risk. And whilst it may be more expensive than buying a house 12 months ago, it still remains a relatively low rate with some banks offering 10 year fixed deals at 2.7%.

The 30 year fixed deal
There is talk that there could be a 30 year fixed deal on the cards from providers. Whilst this is not guaranteed, this is a sign from the government that they are looking to help homeowners – especially new ones – join the property ladder.

We say, don’t panic
Experience has taught us that we find a way through these moments. Inflation will get worse before it gets better and we don’t have a crystal ball but we could expect to see the pain for another 6-9 months – if economists are correct.

We expect to see a cooling off on property prices in that time so buying a home becomes cheaper and if inflation does start to get curbed more quickly with a higher interest rate rise then we can expect to see a bit more flexibility in our pockets as well. (See what other agents are saying about the interest rate rises)

We lived through the financial crisis of 2008/9 and saw seismic changes to the housing market in that time and this is different.

Things like the global equity market are going to start moving towards property as a more safe investment and what this means for the average household buyer is, property becomes an even more important investment for personal finance and wealth.

Whilst things may appear to be a bit more daunting right now, we have to remember that we are still experiencing record low interest rate figures and that the housing market has many sellers putting their properties up for sale all the time.





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