interest rates BoE interest rate rise bank of england

Interest rate rise: UK property industry reacts to new 5.25% rate

Today, the Bank of England has actioned a further interest rate rise of 25 basis points, bringing the base rate to a 15-year high. What effect will this have on the market?

While most industry commentators had anticipated an interest rate rise today, the increase has come at a lower level than some had expected following the latest inflation results. The Bank of England governor, Andrew Bailey, has said he believes the rate will fall back again in the autumn to 5%, easing borrowing pressures.

Bailey added that the UK’s economy has been “much more resilient” than expected, which is “good news”, adding: “We hope we can deliver the path that we set out in the [monetary policy] report, as that path does not have a recession in it. We will have to see.”

Across the property industry, borrowers have been the most affected by each interest rate rise as this has been reflected in mortgage rates. Those on their lender’s standard variable rate in particular may be the worst stung by high rates of borrowing at the moment.

Interest rate rise reaction

According to Moneyfacts data, the current average standard variable rate is 7.85%, which is significantly above most fixed rate mortgage rates. Commenting on the latest 0.25% interest rate rise, Moneyfacts finance expert Rachel Springall has some advice for borrowers:

“Those who still have a low-rate fixed mortgage would be wise to overpay where they can, with the aim of reducing their loan and the term of their mortgage.

“Interest rates on mortgages are much higher than some may realise, so borrowers will need to ensure they have surplus funds to meet higher repayments when they come off a lower rate deal.

“Fixed rate mortgages, for two, five and 10-year terms are around 3% higher on average compared to December 2021 and the average Standard Variable Rate (SVR) has risen consecutively over the same period, so a fixed mortgage can give borrowers some peace of mind by securing their monthly repayment.”

Overleveraged buyers and investors could struggle

Matt Thompson, head of sales at Chestertons, said: “We expect the rate rise to have a particular impact on homeowners with a variable mortgage as well as overleveraged buy to let investors whose increased mortgage payments could result in their investment making limited profit or a loss.

“Although there still is a vast number of buyers wanting to move as soon as possible, rising interest rates are forcing house hunters to be more cautious, review their financial situation and calculate a more conservative budget.

“Whilst this has recently resulted in fewer new buyers entering the market, we expect activity to pick up again once buyers have adjusted their criteria and lenders are bringing more products to the market again.”

Is this the interest rate rise ‘peak’?

Phillip Nelson PhD, research officer for Propertymark, the professional body for property agents, said: “An interest rate rise of only 0.25% has been widely anticipated since June’s inflation figures. Seeing this come to pass is a good sign that we will soon see interest rates peak.

“Peaking rates will be a positive sign for many homeowners, and even lays out some hope that fixed mortgage rates will start to fall.”

Small jump is good news

Paresh Raja, CEO of Market Financial Solutions, said of today’s interest rate rise: “That the base rate now resides above 5% is not in itself a significant issue; this was, of course, the norm before 2008. But the fact the jump up from a meagre 0.1% has come in a relatively short space of time (since December 2021) has offered borrowers, investors and businesses little time to adapt to higher rates.

“Positively, looking ahead, economists are suggesting the base rate may not rise as high or as quickly as once thought, and the rates available on products are starting to reflect that. Today’s hike shows that – perhaps counter-intuitively for borrowers, even though the base rate rose, there is some good news in that the jump was smaller than previously predicted, allowing lenders to reassess their rates accordingly.

“But right now, flexibility and communication from lenders remains of utmost importance, helping both existing and prospective clients to borrow responsibly without pulling products out from under them or being too rigid in the terms of loans.

“The market will realign to a higher base rate in due course, but today’s latest hike from the Bank of England reaffirms that lenders must double down on a proactive approach to supporting property owners and property buyers who will feel the effects of it.”

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