Global house prices are at a record high and in countries such as the UK and the US, there is one common factor – low interest rates that are causing lower mortgage deals to support demand.

But, as interest rates are set to rise in the UK, what impact could it have on the UK housing market?

Let’s discuss…

Following the surprising recent Bank of England announcement where it was confirmed that the UK interest rates of 0.1% would remain until at least December 2021, many mortgage lenders have decided to raise their own mortgage rates to account for the likely increases in 2022.

But, whether or not this will cause house prices to drop is unclear as according to experts, it all depends on both the size and timing of the rate increases and therefore, the forecasts that we are seeing right now are varying greatly.

In August, the UK Official House Price Index announced that despite the COVID-19 pandemic, the UK House Pricing had had an annual growth rate of 10.6%, one of the highest increases since 2007, making it some of the highest historical house prices for first-time buyers. Many of which, according to Tom Bill, Head of UK Residential Research at Knight Frank, “do not know what it’s like when interest payments rise meaningfully.”

Since 2009, more than 3.5 million first time buyer mortgages have been issued since the Bank of England dropped its policy rate to 0.5% then to 0.1% last year, the lowest since records began.

A senior economist at S&P Global Ratings added that any interest rate increases are likely to increase the costs for potential buyers and in turn would lower the demand, “putting downward pressure on house prices” in the long run (pushing lenders into raising their prices).

However, as we mentioned in a previous article, increases in interest rates are only likely to affect a small number of borrowers who have variable rate deals, and of course impact, first-time buyers on tighter budgets and those with less financial leeway. Plus, be dependent on specific areas around the country where prices are already being stretched to the extreme.

There are ways though in which banks can combat struggles due to increased mortgage rates such as by increasing costs within their margins and other factors such as business owners increasing the wages that they offer to offset the struggles that a rise in interest rates could cause.

However, this is easier said than done and according to the Royal Institute of Chartered Surveyors, there is also a near record-low number of houses for sale across England and Wales too which has caused increased house prices and is set to continue.

This, once again, is faced with an opposing argument where other factors are suggesting that despite prices being at an all-time high, weakening house price growth is apparent.

Overall, in reflection of the current UK Market, and comments that have been made, there are a lot of mixed opinions, but it does suggest that house prices are still likely to increase over the next year, but at a slower rate if interest rates were to rise. However, this is all dependent on the amount in which the Bank of England decides to increase its interest rates, but also at what time it chooses to do so as well as several other contributing factors.

If you are concerned about the impact rising interest rates could have on your mortgage, then please do not hesitate to get in touch with one of our friendly financial advisors who are more than happy to give you a helping hand and make sure that you are covered financially. You can call us on 01255 688400 or email us at info@coffeybrooks.com for more information.

Coffey Brooks are a team of Independent Financial and Mortgage Advisers based in Clacton-On-Sea, Essex and are directly authorised and regulated by the Financial Conduct Authority.