Last week many experts forecast that the Bank of England would up the interest rate perhaps to 0.25%. And that would kick off a rise in mortgage rates that would start to impact the property market.
The forecast rise didn’t happen of course. But it is perhaps time to face facts: It’s not a matter of if but when. The only way mortgage rates can go is up. For the first time in around four years the cost of buying a house WILL go up sometime soon.
Apart from the fact that so much is kind of obvious most experts forecast the rate will rise pretty soon. For example, a report in The Guardian suggests the financial markets have already ‘pencilled in’ a 0.15% rise before Christmas, and two further rises of 0.25% each in spring and autumn 2022.
In recent days Bank of England Governor Andrew Bailey has said that the bank won’t hesitate to raise the interest rate in order to counteract rising wages and resultant inflation. Few, however, are predicting the rises will be any greater than those predicted above.
So what will happen when the mortgage rate rises?
Let’s look at a few facts.
It’s pretty much guaranteed that interest rate rises will be small. Even a rise to 0.75%, as reported above, will still result in one of the lowest interest rates ever.
Most lenders will have already factored these rate rises into their plans. The mortgage rate isn’t the same as the Bank of England base rate of course. Mortgage rates won’t rise much at first, and maybe not at all. The mortgage market is very competitive and lenders continue to have a strong appetite to lend.
Many existing mortgage borrowers are on fixed rate mortgages, which are often exceedingly cheap. Fixed rate mortgages of one, two and even five years have become very popular of late. Savvy borrowers have been remortgaging onto these deals over the last year. These borrowers won’t be impacted for a year or even four.
When mortgage rates do go up new and mainly first time buyers are likely to be impacted at first, as new mortgages cost more than they have done for some time. Then existing borrowers will start to feel the pinch as fixed deals end.
It’s worth bearing in mind, however, that longer term borrowers have benefitted from very low mortgages rates over the last 11 years. Many will have paid down their balances significantly more than they anticipated since 2009.
As the rate rises take effect over the next few years they seem bound to slow the housing market, as buyers will have reduced buying power.
Could this lead to a fall in house prices, or even a housing market crash?
This is something everyone in the housing market will want to know. It seems fairly unlikely at the moment, however. Most housing market forecasts made over the last few months have already factored in the inevitability of a mortgage rate rise and have forecast a buoyant market nevertheless.
Hamptons’ latest Market Insight Sales Market Forecast Autumn 2021 forecasts a 3.5% rise in house prices in 2022 and 13.5% over the next four years. Savills’ Residential Property Forecast also predicts 3.5% growth in 2022 and 21.5% over five years for the mainstream property market.
Could the rising mortgage rate lead to more repossessions?
Historically (as well as logically) it has tended to be the case that a rising cost of lending does create a severe problem with affordability. Borrowers who cannot afford their repayments and who are unable to sell because of a weak market, and are possibly also affected by negative equity, are forced into repossession.
While it is difficult to say this also seems unlikely. Following the 2008 financial crash the Government and lenders alike showed that they were not prepared to see large scale repossessions and a possible housing market crash by introducing a number of support schemes for borrowers. So, should significant numbers of borrowers find themselves in difficulty, it’s not unlikely that there could be more schemes to support them. And that’s all in addition to any more new incentive schemes to encourage new buyers to keep on buying.
So, in short, although a rise in interest rates is inevitable, it’s likely that the impact will only be gradual. After all the publicity given to an interest rate rise it may even seem like something of an anticlimax.