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What Does Yesterday’s Interest Rate Rise Mean for the UK’s Property Market?

UK Property Market

Yesterday’s anticipated decision by the Bank of England to raise the UK’s base interest rate from 0.25% to 0.5%, accompanied by a cautious tone, cooling expectations for further quick rises led to a mixed response. The pound recorded its sharpest drop against the euro in a year immediately after BoE Governor Mark Carney’s press conference, despite having risen on the initial announcement.

The drop in the pound was provoked by comments made by Carney that interest rates rises, the future pace of which just last month he had said markets were underestimating, should instead now be expected to be slow and steady. Until yesterday it had been widely expected that next year would see another couple of 0.25% rises. Carney yesterday said he expects only another 2 to 3 small rises, bringing the base rate to around 1% by 2022, by which time the UK should have left the EU.

While it is possible the Bank of England’s position could potentially shift again, depending on wider market conditions, yesterday’s more conservative stance on what expectations should be for further rises in the immediate future should be a boost for mortgage holders. There are widespread concerns that rate rises will have significant impact on the property market, which is already forecast to see sluggish growth over the next 5 years. As well as meaning current holders of mortgages could struggle to keep up with increased payments, more expensive mortgages will restrict the value of mortgages new buyers and movers are able to secure.

Most mortgage holders in the UK are currently on fixed-interest deals rather than variable rates, which is good news. TSB yesterday wasted no time and was the first bank to announce that it would be raising interest rates on its variable rate mortgages to reflect the base rate rise. Many owner occupiers and individuals with investment properties with mortgages outstanding on them have negotiated new fixed rate mortgages recently, in anticipation of rate rises. Approvals on remortgages saw a near 4,000 rise on monthly averages over the past 6 months, also 20% up on the same time last year.

Rising interest rates are forecast to contribute towards the general slowdown in the UK’s property market over the next few years. Only 1% average growth is predicted for next year though that is expected to pick up again to 5% by 2020. Further interest rate hikes expected post-2020 are expected to price growth subsequently cooling again, down to around 2.5% over 2021 and 2022.

Those with mortgages on investment properties may be more affected than most. Recent rule changes on buy-to-let properties mean that interest on mortgage payments is being scaled back gradually and within a few years will no longer be tax deductible. Investors in London property would be expected to feel the pinch most intensely with rental returns to purchase prices among the lowest in the UK and prices expected to stagnate over the next couple of years. While the change in expectations around the pace of interest rate rises will be considered as good news, buy-to-let landlords with investment properties will have further cause to consider whether higher mortgage payments that are not tax deductible still make sense.

Risk Warning:

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

Paul

The author Paul