What effects will the interest rate rise have on the UK housing market?

Interest rates are now at their highest point for 15 years as the Bank of England battles to reduce inflation. The base rate went up by half a point on Thursday, June 22, from 4.5% to 5%, which will increase many people’s monthly mortgage repayments and affect the lending deals offered to borrowers.

Inflation is staying stubbornly high, reaching 8.7% in May: the Bank’s aim is to keep it at 2% annually. We look at what this latest interest rate rise means for UK house prices.

Why is inflation so high?

It’s partly due to savers stashing money away during the lockdowns and now spending it; this combined with wage rises since then, means that money is flowing into the economy. The aim of higher interest rates is to lower inflation, as those with mortgages will have less disposable income to spend.

But the situation is volatile, and while it’s expected that with better news on inflation, rates will come down, a further interest rate rise is possible. Governor of the Bank of England, Andrew Bailey said he expects inflation to fall `significantly’ this year as energy prices fall. While the economy is performing better than expected, he said that inflation is still too high and if rates were not raised now, the situation could be worse later. This latest rate hike is the 13th in a row since December 2021.

How will it affect mortgage homeowners?

An interest rate rise typically triggers an increase in mortgage rates. The full impact of the rise will not be felt for a while due to the number of people still on fixed-rate mortgages, according to The Bank of England. According to UK Finance, about 800,000 fixed-rate mortgages will end before the end of this year, with a further 1.6m ending by December 2024; those affected will face higher costs to remortgage and some will see their monthly payments doubling. Over 1.4m people on tracker and variable rate deals will see their monthly payments rise immediately. An average two-year fixed rate residential mortgage is now 6.23%, and a five-year fixed rate is 5.82%.

The rate rise will squeeze those with the biggest mortgages, and it will particularly affect a small group on variable rates. While many people borrowed to their maximum levels during the Covid-19 Stamp Duty holiday, the government has ruled out help for those struggling with increased payments, stating that this would be counterproductive and inflationary; it wants to fight inflation to keep costs and interest rates down long term.

The Bank of England.

UK house price growth likely to slow

The cost of living combined with an interest rate rise will be challenging for many people, said James Lindley, director of financial advisers Castell Wealth Management who commented:

The announcement of yet another interest rate rise to 5% will be painful for borrowers coming off fixed-rate mortgage deals. Unfortunately, this is predominantly the case for those on the lower rungs of the housing ladder who have purchased properties relatively recently, where they will likely also have bigger loans to service.

These first-time buyers may well have saved funds in the previous Covid Stamp Duty holiday, but now may well be struggling with the bulk of their disposable income being taken up by childcare costs, and the increased cost of living. To now afford hundreds of pounds extra per month will be difficult. With 1.4mn households set to roll off their fixed-rate mortgage in 2023, there is a gloomy outlook for many.

Whilst price growth in the housing market is likely to slow for the remainder of the year, this is very much regional, and a recent study of small-to-medium sized towns surrounding cities actually shows growth of around 5% this year, meaning that these properties rank as the fastest-growing groups in terms of price growth in 2023. This includes towns such as Saffron Waldon, East Grinsted, Honiton, Eastleigh, and represents a shift from growth in the countryside which has been the fastest growing area from 2019-2022. No doubt, pressure will be put on the UK housing market, but what happens next in Andrew Bailey’s quest to curve inflation is yet to be seen.

Significant monthly increases for millions

Dr Alla Koblyankova, course leader for property finance and investment at Nottingham Trent University commented:

With around 80 percent of UK mortgage borrowers on variable, tracker or short-term fixed-rate mortgages, the recent base rate increase means that a huge amount of people – approximately eight million households – will face significant increases in their monthly mortgage payments, in the region of hundreds of pounds per month. Borrowers who are on the margins face a difficult choice. If they can’t find an affordable deal, some may have to increase their mortgage term to allow the debt to be repaid in smaller amounts over an increased amount of time.

Other people may sadly have to sell their homes to find something more affordable. The increase will also complicate things for first-time buyers more than other households, as they will need to pass difficult affordability checks in order to obtain a mortgage in the first place. Many people who are taking their first step on the housing ladder also tend to be on lower incomes than those who have been homeowners for several years.

Average UK house prices have risen in recent years

Current regulations mean that `stress testing’ is done to ensure borrowers can afford their fixed mortgage rate plus 3%, so while households will have to cut back their spending, their mortgage should still be affordable, making the prospect of repossessions as seen in the 1990s unlikely. Experts say this is because of the higher levels of equity that people have in their homes – in recent years UK house prices have risen dramatically as the country experienced a housing bubble, with average house prices rising across the country. Data from hm land registry reveals that the average UK house price in April 2023 was £286,489. According to Savills, while borrowing increased by £168bn, the growth of total equity in the UK housing pot was over nine times that, at £1.46tn.

And there is now more regulatory pressure on lenders from the Financial Conduct Authority (FCS): lenders must show `forbearance’ and help borrowers find a solution. Lenders must offer existing customers a mortgage deal and help them reduce their monthly payments, for instance by switching from a repayment to an interest-only loan, extending the term of the mortgage, switching to a tracker rate or taking a payment holiday.

First-time buyers

First-time buyers will find it harder to get a mortgage deal as lenders have removed many products for those with a small deposit from the market. As lending conditions tighten, without a substantial deposit, the situation for UK house buyers becomes more difficult, especially in view of recent house price rises.


They face higher rents as a knock-on effect of landlords being hit by higher mortgage costs. According to Zoopla, the average UK tenant is already spending over 28% of their pre-tax income on rent. The National Residential Landlords Association has warned that many landlords are selling their properties in view of rising costs and regulation, which will lessen the number of houses for rent.

New housing development is expected to be impacted by rising interest rates.

The house building industry

The rate rise is likely to result in a fall in the number of development starts in the new build sector. Higher interest rates may impact the supply side of the housing market as developers face increased borrowing costs, leading to a slowdown in construction. Ben Woolman, Director at property developer Woolbro Group said that the rise will be devastating for many and called for a reform of the planning system which he describes as `outdated and ineffective’. He added:

While this wouldn’t help struggling mortgagers in the short term, it would prevent local politicians from blocking new housing developments where they are needed most. By bringing the supply of new homes in line with demand, we can eventually make homeownership a reality for those who today are completely priced out of the market.

Will we see a housing market crash?

Economist and wealth adviser Jonathan Davis of Jonathan Davis Wealth Management (https://jonathandaviswm.com) predicts a drop in house prices. He said:

The Bank of England believes that, to bring down inflation, they have needed to raise the Base Rate…again and again and again. Mortgage rates have also risen, from sub 2% to over 4% or even above 5%, since early 2022. However, as inflation is proving not to be falling quickly enough, it is likely the Base Rate and mortgage rates will stay high for longer than most have been expecting. 

I expect no cuts until 2024, at the earliest. House prices have been falling, now, for several months and they are likely to continue falling well into 2024, as we also are likely to enter an economic recession, with materially higher unemployment. Currently, my base case is that the UK average house price will fall 10-20%, from the 2022 peak, by next year.

According to the latest analysis by research house Capital Economics, the number of house sales is likely to drop by 25% this year and not recover until 2025 following the rise in mortgage rates. They predict house prices falling by a further 12% below current levels, and if the mortgage rate remains at 6% for longer than expected, prices could drop as much as 25%. House prices could also cool if investors leave the housing market due to rising interest rates, as alternative investments such as bonds could be more attractive than property.

New terraced townhouses built for first-time buyers in London’s Docklands.

So, is now a bad time to enter the housing market?

Claire Flynn, mortgage expert at Confused.com mortgages said that interest rates are predicted to rise to at least 6% by the end of the year. For anyone thinking of buying a house, she commented:

It really depends on your circumstances. Mortgage rates have increased but house prices have started to gradually decrease. As long as mortgage rates keep rising, property value should continue to fall, and towards the end of the year, we could even see prices 6-7% cheaper, depending on the area and local demand. Be sure to do your research as rates are high, but there’s still competition between lenders. A mortgage broker will be able to help you compare mortgages available across the market and make recommendations on how long to fix for, and which type of mortgage would suit you best.

The housing market outlook

Higher mortgage rates are expected to have a significant impact by making it more expensive for people to borrow money to buy a home, which could lead to a slowdown in the market and downward pressure on house prices. However, much depends on how inflation behaves over the next few months, and economic conditions.

While house prices seem unlikely to rise any time soon, the shortage of houses for sale may prevent any notable price falls, especially in sought-after areas. According to Rightmove, more people are wanting to view homes than this time in 2019, and the number of visits to its `mortgage in principle’ service increased by 53% between May and June 2023, as people want to see what they can borrow and reassess their situation.

Many homeowners will be comforted by having seen the equity in their homes grow in recent years, while those highly borrowed, coming off fixes and on variable rates will be anticipating choppy times ahead. The Bank of England’s monetary policy committee meets every six weeks to decide whether interest rates should change: inflation is being scrutinised and clearly holds the key to our housing market.

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