Interest rates placed at decade high: what does this mean for the property market?

Following a steady increase in borrowing and spending, the Bank of England announced that UK interest rates are set to rise from 0.5% to 0.75% for the first time since they were lowered during the aftermath of the financial collapse in 2009.

The unanimous decision was made on the prediction that the UK is transitioning out of the weak spell caused by the ‘Beast from the East,’ in the opening financial quarter. With a focus on the improved economic growth expected to rise from 0.2% to 0.4%, Mark Carney, governor of The Bank of England believes that the UK will benefit from “limited and gradual,” interest rate rises.

This could mean that the move will adversely affect almost 3.5 million mortgages. Any mortgage on variable or tracker rates will see a rise in the amount they pay.

It is predicted that the average standard variable rate mortgage will see an annual increase of 4.72% on their repayments; in real terms, this is likely to increase the annual cost by £228. The statistics indicate that a £150,000 mortgage, with a current monthly repayment of £673, will see this increase to £692 per month, allowing the additional 0.25% interest rate. Although an increase of £19 a month is not a catastrophic amount, those already stretched will definitely feel the pinch.

Nationwide’s chief executive economist, Robert Gardner, commented: “A 0.25 per cent increase in rates is likely to have a modest impact on most borrowers who are on variable rates. For example, on the average mortgage, an interest rate increase of 0.25 percent would increase monthly payments by £16 to £700, equivalent to about £190 extra per year.

“While the impact for most borrowers is likely to be modest, it’s important to note that household budgets have been under pressure for some time because wages have not been rising as fast as the cost of living. Indeed, in real terms – that is, after adjusting for inflation – wage rates are still at levels prevailing in 2005.”

As predicted figures fluctuate, the market should prepare to help home-owners. Doug Crawford, CEO of My Home Move has added: “As for the market itself, despite some borrowers seeing a slight increase in payments, we should see the risk controls put in place by Lenders over the last few years continue to provide stability and protection.

“Banks and Building Societies are continuously providing new and innovative products to cater to changing borrowing needs, so no doubt they will continue to offer competitive deals for their customers. Borrowers should continue to shop around for the best deal to suit their circumstances, always bearing in mind the long-term financial implications of the deal they settle on.”

Whilst those on variable and tracker mortgages will be worried by the rise in interest rates, many with savings are likely to moderately benefit from the recent increases. However, whilst mortgage lenders are usually swift to implement changes to mortgages, they are rather more reluctant to raise savings rates.

Currently, the average interest rate offered on an easy access account is 0.23%. Based on past trends, by the major high-street banks, the most a saver can expect is a rise to 0.3% or 0.4%. Cynically, the banks will use this as an opportunity to increase their net interest margin (NIM) and further improve profitability.

Mark Carney, governor of The Bank of England believes: “Rates can be expected to rise gradually. Policy needs to walk, not run, to stand still.” While many mortgage users will be worried about the present implications, it would seem that the UK should expect more rises in the near future.

Will the recent interest rate rise have a negative impact on the property market? Will it have more of an impact on those with variable rate mortgages than the figures predict?

Bank of England’s Interest Rate Announcement  

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