Rising interest rates could wipe out the pandemic housing boom

The Bank of England recently announced a hike in lending rates from 0.75% to 1% – the highest level in 13 years – with a dire warning that the UK economy would suffer a setback

The Bank of England has hiked interest rates for the fourth time in a few months. The announcement comes amid an increasingly challenging financial climate with rising inflation and the general cost of living.

For mortgage holders, homebuyers and savers, this latest rate hike will come as a “bitter blow” as it will dampen the outlook for first-time buyers, while existing homeowners will feel further pressure on their already stretched monthly budgets.

Amanda Aumonier, head of mortgage operations at online mortgage broker Trussle, said this increase is “the camel’s last straw” for many homeowners.

“Homeowners are under incredible financial pressure and this hike in interest rates will only add fuel to the fire in the short term while first-time buyers struggle to fulfill their dream of owning a home.”

How does it affect homeowners with an existing mortgage?

The Bank of England rate hike will not be welcomed by adjustable rate mortgage borrowers as the cost of their mortgage will increase, but those with fixed rate mortgages are safe for now.

Martijn van der Heijden, CFO of broker Habito, said: “For the quarter of UK homeowners who have a variable, tracker or standard variable rate, this increase will increase their repayments; With tracker mortgages the change is instant and secure, with a variable rate it is up to the lender.

The good news, however, is that almost 75% of UK homeowners have a fixed income contract and will remain largely unaffected.

Adrian Anderson, Director of Property Finance Specialists, Anderson Harris, said: “Those with a fixed rate will not be affected today, but the fixed rates available in the future are likely to be more expensive, so anyone with a fixed rate that is about to end should consider themselves look around as soon as possible.

Iain McKenzie, CEO of The Guild of Property Professionals said: “People with fixed-rate mortgages should keep an eye on when their deal will be renewed and prepare in advance.

“As demand for real estate across the country remains strong, the housing market is likely to weather any near-term problems in the economy. Homeowners can be sure that their property will continue to retain its value.”

How does it affect first-time buyers and enthusiasts?

Many experts believe that newcomers to the market are the most vulnerable to rising borrowing costs, rather than existing homeowners.

Hit hard from all sides — rising rents, higher interest rates and tighter lending standards — first-time buyers will struggle the most.

Vadim Toader, CEO and co-founder of Proportunity said: “The increase is another blow to first-time buyers trying to climb the apartment ladder. Many who have been saving for years are now facing further delays before they can afford to move as more mortgages will be out of their credit reach.”

Rachel Springall, finance expert at Moneyfacts.co.uk, called it “disappointing news” for consumers already grappling with the cost of living crisis: “Aspiring homeowners may need to reconsider whether they can even afford to step into the Real estate leaders are stepping in due to rising costs and rising home prices.”

What the future brings?

With inflation still high, this latest rate hike was anticipated by money markets, but experts don’t expect it to dampen the substantial buying and selling sentiment in the property market.

Jason Tebb, chief executive officer of real estate search site OnTheMarket, said: “Even with another quarter point rise, interest rates remain low. The housing market is more stable than the frenzy we experienced last year and has settled into a manageable, stable, ‘new normal’ environment.”

“The number of new properties for sale is slowly increasing but not yet keeping pace with demand. New listings are not long in coming, with 63 percent of properties selling under contract within 30 days of the first listing in the last month (SSTC), according to our forthcoming OnTheMarket Property Sentiment Index.

“The key is that buyers remain confident they can get the mortgages they need and can afford them. Modest rate hikes, while undesirable, are unlikely to result in the brakes being applied as many buyers will simply have to relocate.”

Similarly, Octane Capital CEO Jonathan Samuels said: “With the cost of living also rising, we can expect buyers entering the market at this time to be much more reluctant to do so than before.

As a result, not only will mortgage approval levels continue to fall but so will the amounts they are required to borrow and the end product of this will be a reduction in the current rate of house price growth seen across the UK market.”

Henry Dannell’s director, Geoff Garrett, sounds optimistic about interest rate changes and believes this latest hike will be good for the housing market. He said: “While this recent surge is unlikely to completely quench our appetite for homeownership, it will certainly dampen the increased market activity that has been fueling the pandemic home price boom.”