More Bad News For Homeowners As Rate Rises May See House Prices Drop

Despite expectations that the Bank of England base rate would drop this year, several mortgage providers have increased their interest rates. This isn’t good news for homeowners who hoped their mortgage payments would be reduced soon.

Several Banks Increasing Rates

Barclays, HSBC, Santander, and NatWest have all announced rises in the last few days, bringing the average 2-year fixed mortgage to 5.82% and the average five-year mortgage to 5.40%.

Despite falling inflation data, the Bank of England has held interest rates steady again. The bank feels that inflation is not falling as fast as it would like, so it is holding rates where they are for now.

The Bank of England Give Its Projections

The BofE website discusses the decision to maintain interest rates: “CPI inflation is projected to fall to slightly below the 2% target in 2024 Q2, marginally weaker than previously expected owing to the freeze in fuel duty announced in the Budget.”

In further commentary, the bank said: “In the February Report projection, CPI inflation was expected to increase slightly again in Q3 and Q4, accounted for by the direct energy price contribution to 12-month inflation. Services price inflation is expected to fall back gradually.”

If, as the bank is predicting, inflation slightly rises later in the year, the bank might be hesitant to lower interest rates too soon, which could push back the rate reduction by a few months.

Experts Still Predicting a Fall in 2024

The London Stock Exchange Group (LSEG) experts suggest that most financial experts are expecting a cut in interest rates in late summer (August) and winter (December). This would likely reduce them to 4.75% by the end of the year.

The last time the base rate was 4.75% was October 2006. In 2009, following the financial crisis, the base rate plummeted to 0.5%. Between April 2020 and November 2021 it was 0.1%, a record low. Generally speaking 4.75% is about average for the last 50 years or so.

Property website Zoopla says, “Today, when you compare a sub-2% mortgage rate from March 2021 to the current 4.5% average, the annual mortgage cost jumps from £7,100 to £11,400 – a 61% increase.”

In addition to having to find an extra several thousand pounds per year to cope with rising mortgage payments, utility bills, food, insurance, fuel, and the like have also increased.

Numbers in Mortgage Arrears Rising

Data from the UK Finance website shows: “There were 93,680 homeowner mortgages in arrears of 2.5 per cent or more of the outstanding balance in the fourth quarter of 2023, 7 per cent greater than in the previous quarter.”

Despite rising mortgage rates, the housing market has proved remarkably resilient. The UK Land Registry website says: “As of February 2024, the average house price in the UK is £280,660. Property prices have risen by 0.4% compared to the previous month and fallen by 0.2% compared to the previous year.”

Whilst the rises appear small at first glance, when multiplied over hundreds of thousands of pounds, the additional borrowing takes its toll. Eventually, this will filter into buying decisions and, ultimately, prices.

Additional Mortgage Costs Eating into Rental Returns

Some landlords are selling rental properties because of diminishing returns on their investments. Property investor Nicholas Barlow said, “I’m reluctant to pass on mortgage rate rises in the form of rent increases, which is reducing my profit. I’ll sell the property to invest elsewhere.”

A likely Labour win in the next election could see the introduction of a major house-building project in the UK. Whilst the impact won’t be felt for some time, in the medium term, prices might start to reduce, helping with mortgage costs.

Price Forcing More Regional Movement

Zoopla’s research on house moves shows people are willing to move further afield. Their website says: “Our latest consumer research shows that a third of households that want to move are looking to move out of their local area to secure their next home.”

If house prices remain resilient at these borrowing rates, there’s a chance it’ll take a while (if at all) before we see them fall. If anything, a fall in rates might even boost house prices. It’s possible that we won’t see a fall in house prices until there’s more housing stock on the market.

Reality Is Factors Coming Together to Boost Markets

The longer-term data shows inflation is falling towards the 2% government target, the economy seems to be growing, and borrowing rates are likely to be lower by the end of the year. This all points towards relief for mortgage payers and more disposable income.

Although we expect household finances to improve over time, we’ll have to wait for now. While it’s likely these rate hikes are short-term, it won’t feel like it for those taking out mortgages in the coming days.