What Rising Interest Rates Mean for the Housing Market

23 September 2022

The Bank of England (BoE) has raised interest rates for a seventh consecutive time in a bid to temper double-digit inflation. 

At the beginning of August, UK interest rates rose to 1.75%, increasing from 0.25% at the start of the year.

The BoE has now raised interest rates to 2.25% in a bid to cut inflation, which reached 10% this year, the highest it’s been since 1982. 

The Bank of England’s Monetary Policy Committee (MPC) voted by five to four to hike the rate by half a percentage point. It was predicted that the rate could have risen as much as three-quarters of a percentage point. 

The MPC expects an increase in the energy price cap to about £3500 in October to result in inflation rising to 13.3% and to trigger a five-quarter recession that will last from the final three months of this year until the end of 2023.

How will this impact the housing market?

The average mortgage payment is expected to rise by around £50 a month due to higher interest rates and the average household fuel bill is expected to reach £300 a month. 

If you have a loan or mortgage that charges you a variable interest rate. You may find that the cost of your repayments goes up. However, if you’re on a fixed rate you won’t see any changes until the end of your fixed period.

What about property investors?

Landlords can expect to see the cost of variable mortgages increase in line with this interest rate change. Therefore, it is important to ensure that landlords and property investors ensure that they fully understand the additional costs involved in property letting. There may be some changes within this market that could lead to new opportunities in the market for landlords to buy new properties or for first-time buyers to get onto the housing ladder. 

Cooling down the housing market

Due to low interest rates making borrowing cheaper and inflating the housing market, first-time buyers have recently struggled getting on the housing ladder. 

With rising interest rates and inflation affecting household budgets, experts such as Tracy French – who is the property manager as ELP Arbuthnott McClanachan – are predicting that there will be less competition for properties. 

She said: “We are experiencing an encouraging post-summer market with inquiries for both selling and buying remaining good but we are noticing that competition has eased, although properties are selling in excess of home report valuation.”

“Looking ahead to the new interest rates we still expect to see positive movement in the market but feel people will be mindful of what level they offer at, given not only the increased interest rates but the increase in the cost of living in general. We may also see a shift in more people selling before they buy to ensure they know definitively what their budget is.”

What does it all mean? 

Paul Hilton, CEO of ESPC, said: “We have seen a modest Bank of England interest rate rise to dampen the effects of inflation. The full effects of this on the housing market remain to be seen but with the cost of living taking its toll on households we would expect buyers to be slightly more cautious price wise when offering for a property.”