rise in interest rates

Over the course of 2022, the Bank of England raised their base interest rate in steps from 0.5% to 3.5% in an effort to reduce inflation. On 2nd February this year, they raised this rate once more to 4%.

This sharp increase has had a significant impact on individuals and businesses. Mortgage rates have been heavily affected, meaning that homeowners remortgaging at the end of a fixed term are getting nasty shocks in the form of much higher monthly repayments. Potential first time buyers are also facing increased challenges getting onto the housing ladder as they’re finding many mortgages are now unaffordable.

But the good news is…

Amidst the turmoil, there’s plenty to be hopeful about in the housing market. If you’re a first time buyer or a homeowner looking to move, it might be a better time than you think to start searching for a property. Here’s why.

  1. It’s a buyer’s market

The property market has been fast-moving and competitive for years. Although houses are still selling, many homebuyers are holding off their search due to the higher mortgage rates, as well as the potential promise of a drop in UK house prices. The result? There’s a smaller pool of competition for the houses on the market right now. This means:

  • You can take your time in your search for a property 
  • Properties aren’t all going to best bids anymore, so you don’t have to max out your borrowing to outbid other buyers.
  • You can even try negotiating a lower purchase price!
  1. Fixed rates are starting to come down again

Given the alarming surge in interest rates over the last year, it’s hard to believe that lenders are actually reducing their borrowing rates again. 

This is down to lenders having previously priced in much higher interest rate rises in reaction to ex-chancellor Kwasi Kwarteng’s September ‘mini-budget’, which panicked lenders and buyers alike with £50 billion in unfunded tax cuts. After his successor Jeremy Hunt reversed the majority of this budget, some stability has returned to the market and lenders are cutting their rates to adjust to their new projections. 

In short: the base rate is still going up but it’s projected to go up much less than lenders initially feared, meaning they can lower rates to match their new projections.

  1. Lenders are trying to help where they can

The higher monthly mortgage repayments have caused a lot of concern for homeowners who’ve recently moved - or are about to move - onto a much higher interest rate. From the start of 2023, lenders have seen a sharp uptick in people getting in touch for advice after avoiding the subject up to Christmas.

The truth is, lenders are keen to help make repayments affordable wherever possible. In response to economic uncertainty, many lenders are now being more flexible to help people find a solution that works for them. They’re offering a range of help such as:

  • Extending mortgage terms to 75 years: This move dramatically reduces the monthly payment amount for cash-strapped borrowers. If you pay into a pension, this could be an option for you.
  • Moving part of the mortgage onto an interest-only basis: Banks prefer to avoid this option for residential homeowners as it risks kicking the can down the road and leaving people in a position where they still owe a huge amount of money at the end of the term - but lenders are offering interest-only options in some cases as a short term option until interest rates reduce further.
  1. Tracker rates are back

The interest on a tracker mortgage can go up or down from month to month, meaning there’s the risk of your repayment spiking suddenly in reaction to market events. This means that homeowners generally prefer the security of a fixed rate and are willing to pay a slightly higher rate for it. But right now, we’re seeing more people holding out with trackers rather than committing to a higher fixed rate mortgage in the expectation that rates will fall again. 

It’s worth considering which is the greater risk, based on your financial circumstances. Is it better for you to be on a potentially volatile tracker or on a fixed term at what might turn out to be a peak interest rate? Talk to a mortgage advisor to find the solution that’s best for you.

The truth about rising interest rates

Despite widespread economic uncertainty, there’s a lot to be positive about in the housing market. In fact, things are looking much more promising than the headlines would have you believe. Properties are staying on the market longer, lenders are starting to reduce rates and are providing assistance where they can, and there’s the flexible option of tracker rates if you’re expecting borrowing costs to fall.

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