Rate rise and the property market

If base rates increase by 0.75%, it is equivalent to a nearly 43% increase on the current level. Given that mortgage interest is one of the biggest expenses a person has in their lifetime, such a colossal rise is bound to have a sobering effect on the market. However, we have already seen rates more than double with little or no apparent effect, which means there are other factors at play than interest rates. The primary factor that has kept the market strong is an excess of demand over supply. This is as a result not just of too few properties being available to buy, but also the huge inhibitor of incredibly high stamp duty rates at the top end, which have virtually frozen the market over £2m. This may not seem like a big deal but it has a huge trickledown effect that prevents people from moving. Another factor is affordability. It may seem as if property prices have gone mad, but if they were judged in real terms after inflation and compared with 2008, they are still relatively cheap (when you look at like-for-like mortgage costs). Another factor working against a sudden crash is the number of people with fixed rate mortgages. These people won’t be affected until they get to the end of their current deal and many won’t be forced to sell for some time yet. Of course, when their deals end it is a different story if they can’t afford the new much higher repayments. Even then, they will have the option to take more equity, extend their loans or even go onto interest-only. The million dollar question is 'Where is the tipping point at which options run out and people are forced to sell, adding to supply and forcing down prices, creating another crash'? Nobody knows for sure, but I suspect it would be considerably higher than the base rate at 2.5%. At these levels, I think we are going to see a subdued market with weakening prices rather than a massive rout. If I had to guess the maximum level the market could stand without collapsing, I’d say it’s somewhere between 3.5% and 5%. Hopefully we won’t have to find out if I’m right. Finally, I think the new PM is bringing a different ‘I’m right and you’re wrong’ approach that goes against the past few decades of trying to guess what voters want to hear and serving it up (irrespective of the dire consequences). It may be that her free market approach does some good and it’s also possible we have reached the ‘maximum bad news’ threshold. I know it’s an optimist's interpretation: but the economy could surprise us yet. Let’s hope it does.

Younger borrowers age 35 and below will be feeling the impact of rising rates the most, as many of them will have never experienced rate rises like this and for the base rate to be climbing to these levels. The Global Financial Crisis created an artificial rate environment that has lasted for almost a decade and a half, and we may now be exiting it. Many borrowers and homeowners are going to be brought back down to earth with a thud. Borrowers who may have fixed in recent years, possibly on rates of 2% and under, can now expect fixed rate products to be in the high threes or to even start with a four. Add in the increased cost of living and people's disposable income gets seriously impacted. As a result, it's vital that if your current product is ending in the next six months, you speak to your mortgage broker as soon as possible to have your circumstances reviewed and have a new rate secured prior to any further Bank of England rate increases.

Interest rates will undoubtedly rise once again for mortgages and possibly equity release products but people will find a way of dealing with them. Even though people are surprised when I tell them that their new interest rate starts with a 4 or even 5, they accept it. People need a roof over their head and rental prices are increasing at the same rate or even higher in some areas of the country. We can't control interest rates, but it will definitely make having a good broker essential for most people to ensure they get the best deal.

Whilst, undoubtedly, the current run of rate rises will cause some potential purchasers to stop and think a little longer before moving forward with their plans, I don't see property values being drastically impacted by the rise in mortgage rates as supply is so low. Landlords on the other hand are being hindered and curtailed by legislation including recently proposed rent freezes and eviction moratoriums in Scotland. Against this backdrop, and with increased rates on buy to let lending and the subsequent squeeze on cashflow and income, this sector of the market may contract sharply in the coming months as some landlords either sell up altogether or simply stay on the sidelines and consolidate and re-evaluate their portfolios. The major area of concern is people approaching the end of their initial 2, 3 or 5-year fixed rates. In many instances, these initial deals will have been secured at rates well under 2%, but the people in questions will find they are switched onto a new rate of more than twice that. In practical terms, for every £100k this is likely to equate to an average increase in monthly payments of approximately £150. This significant increase, along with the general cost of living crisis, is now reaching a point where some people may have to start contemplating the viability of maintaining their mortgage and whether selling up and downsizing is a prospect that needs to be seriously considered.

Who would be a first-time buyer? With the increased cost of living and rental increases, the average first time buyer will struggle to save enough for a deposit. Those that do manage to square the circle will then face the hurdle of increasing mortgage rates and limited availability. Oh and that's before we look at house prices that are historically at, or near, record highs as a percentage of average income. On the flip side many existing homeowners will undoubtably struggle to cover the significantly increased mortgage costs associated with expiring fixed rates. Expect to see repossession rates spiral from quarter 2 next year as mortgage providers are forced to repossess.

With most mortgages on a fixed rate and many having been sold for a five year period over the last couple of years the immediate impact of interest rate rises will only be felt by those on variable contracts, which is the minority. However, those looking to buy for the first time or move they will be eying the new mortgage costs and it may impact sentiment. The changes to affordability calculations may enable people to borrow more, but, will people adjust that quickly to the new cost of ownership? That may lead to a lull in interest. Then there is the section of borrowers who are on variable rate because they have no option and these interest rate rises may well cause financial hardship, that may force sales or indeed force lenders to seek possession - this is a longer term risk. So short-term we may see a quieter market which will probably mean a softening of prices. In around a year, if the market conditions remain unchanged, we will start to see unemployment rise and lender forced sales start to appear. If there is no clear improvement by that time, prices will drop further. There are a great many "ifs" in this paragraph and that is a reflection of the market today - no one knows and no one likes uncertainty. Rates are going to be volatile for a while until there is some idea of the future.

It's definitely interesting times. First time buyers will still be hungry to buy as renting is in essence paying 100% interest, plus price pressures are driving landlords from the industry. The people who are really going to struggle though are your guys already on the ladder with a large mortgage on 1 point something percent coming to the end of a fixed rate - a lot of them doing have the extra several hundred pounds a month that this is going to cost them and they'll be forced to sell. In essence you'll get a multiple tier property market where business is brisk for cheaper and high end properties with the market in the middle feeling very squeezed.

We are already getting notifications of mortgage products being pulled and new rates being announced this Thursday. Another massive hike in the cost of mortgages will be a disaster for the housing market, with mortgage payments being unaffordable for many home owners AND landlords. Landlords will increase rents and households could be forced to sell if they cannot afford the payments.

A 0.75% hike in the base rate, with the promise of further increases to come, would likely lead to house prices continuing to fall. The latest figures showing a 15% year-on-year rise are based on completions and registrations at the land registry in July, which means purchases that were agreed in the first few months of the year. A lot has changed since then, and it's likely prices on deals agreed now are already falling. Unable to afford the mortgage when their fixed rate deal ends, forced sales are highly likely. Further increasing supply and downward pressure on prices. This correction is long overdue and much needed. House prices are disconnected from all reality and destroying living standards.