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Published 01st September 2022 by | Conveyancing

How will the change in interest rate impact the housing market?

House prices graph

After the latest decision from the Bank of England to increase interest rates from 1.25% to 1.75% to stem inflation, many are wondering if the impact will indeed slow the housing market. We take a look at the possible outcomes after the biggest jump in interest rates in 27 years.

On the 4th August 2022, The Bank of England announced; “We’ve put up interest rates to help return inflation to our 2% target. What happens to interest rates in the coming months will depend on what happens in the economy”.

Since last December, the interest rate has risen from a historic low of 0.1%, to the new rate of 1.75%, and is unlikely to be the last rise.

First time buyers, or buyers looking to move house in 2022 will be acutely aware of the current state of the UK housing market. The latest rise in interest rates could make some first time buyers think twice about getting a mortgage, and sit tight to see the longer effects of the increased rate.

But, despite this, there are still plenty of opportunities to buy or move property in 2022.

What is inflation?

Inflation refers to the overall increase in prices.  A moderate level of inflation (around 2%) is widely considered positive for an economy since it drives growth. However, when inflation jumps dramatically, i.e. by 9.4% in the twelve months to June 2022.

This becomes a problem because businesses have difficulties keeping pace with their own spiralling costs and can’t offer pay rises to match inflation. This reduces the spending power of consumers, slowing down the economy and leading to recession.

What do higher interest rates mean for the housing market?

Raising interest rates is a historic strategy to slow down inflation, but it can create problems in some sectors. General interest rates are reflected by the mortgage rate offered by lenders, which makes mortgages more expensive for borrowers, reducing demand from buyers.

Increases in mortgage rates are also likely to impact buy-to-let landlords, who will see higher mortgage repayments eating into their cashflow.

On the other hand, because the actual income remains the same, they will still be taxed at the same rate, forcing them to pay tax out of their own pocket. In these circumstances, many landlords are likely to decide to sell up.

Can inflation be a good thing for the property market?

Although the situation may seem unpromising at first sight, there are still many opportunities to be had. For one, house price inflation is usually a good thing for anyone planning to sell their property.

Because house prices have risen so dramatically, the mortgage you will have to repay may be negligible. For example, if you took out an interest-only mortgage for £150,000 to pay for a £200,000 house that is now worth £800,000, you will have a clear income of £650,000 to spend on your next home.

A landlord with a modest portfolio, for instance, may sell one property and use the profit to pay off the other mortgages, allowing them to increase their cashflow.

 This will also have the effect of releasing properties into the market, bringing more supply and opportunities for buyers.

Fixed mortgage rates vs. variable rates

fixed rate vs variable rate mortgage sign

Having a variable rate mortgage allows your lender to raise and lower your rate with the market, this can be smart if the market is expected to fall.

However, a fixed rate mortgage offers protection and security to buyers.  Although a fixed-rate mortgage is usually set a little higher than the opening rate for a variable mortgage, it guarantees your mortgage rates if the market looks likely to climb steeply for some time.

10-year fixed mortgages

Many lenders are currently offering ten-year fixed mortgages, with some innovative lenders even starting to offer 50. This presents a big opportunity for buyers taking out a fixed-rate mortgage, to ensure that your repayment burden will be secure and consistent in the future.

Moving property is still a great option

And, then there are personal reasons to consider moving home – you may need more space to start a family, need to move closer to a new job, or into a school catchment area. Moving property in 2022 is still a viable and sometimes necessary option for many. Despite the UK experiencing high inflation, there continue to be opportunities to purchase property. Gaining the right advice and guidance to support you through every step of the conveyancing process is key.

Looking to buy or sell a property?

For more information on the conveyancing process, conveyancing fees or guidance on what steps you should take. Contact our expert Conveyancing team to start your journey.

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Osborne Morris & Morgan is an award-winning and nationally-recognised firm of solicitors. Based in Leighton Buzzard, Bedfordshire, our team of solicitors serve clients in the home counties and throughout the UK.

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