Will the housing boom slow down with the new Rate rise?

The Bank of England’s decision to raise the base rate from 0.25% to 0.5% could put the brakes on a runaway housing market, which has seen prices boom over the past 18-months.

This is the first back-to-back rate rise since 2004, and industry experts say that higher mortgage costs, coupled with spiraling fuel bills and higher taxes will squeeze consumer finances and dampen confidence.

The Guild of Property Professionals chief executive Iain McKenzie says: “The rise in interest rates could put the brakes on the house price boom we’ve seen in the past 18 months. Prospective buyers will have to balance their finances more carefully if costs rise and price growth doesn’t cool as quickly as expected.”

However, he added that many homeowners are on fixed-rate deals, which will give them some breathing space regarding rate rises. “Many of these owners, however, will be keeping a close eye on rates because these fixed-term deals will need renewing eventually. Around 1.5 million fixed-rate deals are expected to end this year and next.”

But some say they did not see these rate rises having an immediate effect on house prices across the market.

Rightmove’s director of property data Tim Bannister says: “The level of demand we’re seeing from home buyers at the start of the year suggests the rise in interest rates is unlikely to dampen the motivation to move.

“We’ve seen a real desire from both sellers and buyers to take action and move at the start of this year, and this is likely to outweigh the impact of an interest rate rise on house prices, at least in the short term.”

Many mortgage brokers say this latest rate rise could spur more people to remortgage, to take advantage of fixed-rate deals before they too increase in price.

Coreco managing director Andrew Montlake says: “Given the runaway inflation figures, it was no surprise the Bank of England felt the need to increase Bank Base rate once more.

“While it will not have too much effect on the majority of mortgage borrowers who have long since run to the sanctuary of fixed rates, this rate rise will continue to drive prospective buyers and those looking to remortgage to act sooner rather than later as they flock to lock into some of the lowest rates still available.

“Added to the increase in energy bills we are all facing, it may be that people’s borrowing power starts to wane slightly as lenders take into account these extra costs. That said, we are still in a low-interest rate environment with lenders eager to lend, and this competitive pressure will ensure that the mortgage market remains very much open for business and affordable to the majority of borrowers.”

Many said that this rate rise will be felt most keenly in the first-time buyer market. Estate agent James Pendleton’s property expert, Lucy Pendleton says: “The direction of travel is clear and this will be bringing first-time buyers out in a cold sweat.

“Affordability is already stretched thanks to low supply and valuations at record highs. Now those trying to get on the ladder face increasing borrowing costs in the face of valuations that remain sky-high thanks to an absence of stock for sale.”

She adds that further interest rate rises could result in a slowdown in house price growth this year as it is likely to mean fewer buyers for the limited supplies of property.

Aside from house prices, today’s rate rise is also likely to have a significant effect on the pricing of mortgage products going forward, with higher fixed and variable mortgage rates.

However many said there the immediate effects may be more limited as this rate rise was widely anticipated and already priced in.

Knight Frank Finance managing partner Simon Gammon says: “Mortgage rates have been ticking upwards since late 2021 but remain exceptionally low by historic standards. There has been some movement since December’s hike, but not a lot. Lenders begin the year with new targets, eager to build market share, which has given borrowers a temporary reprieve.

“Rates will inevitably rise over the coming months. How much depends on whether today’s hike has the required dampening effect on inflation, but it’s highly likely we’ll see more base rate rises over the course of the year. That will transform pricing in the mortgage market and those that don’t act soon will wish they had done in only a few months.”

Kensington Mortgages capital markets and digital director Alex Maddox adds that the market had been anticipating this increase, and this has been priced into the financial markets that dictate the price of many mortgage deals.

As a result, he says, this latest rate rise may not result in an “instant feed-through to mortgage pricing”. But he added that some lenders may use today’s decision to increase mortgage rates, making longer-term fixes a more attractive option for many customers.

Hargreaves Lansdown senior personal finance editor Sarah Coles says: “For the 2 million people on variable-rate mortgages, the pain is likely to be immediate. The December hike saw the average tracker rise from 3.38% to 3.53% by January, while the average standard variable rate rose by one basis point, to 4.41%.

“For three-quarters of mortgage holders, higher rates will only become a problem when their fixed rate deal comes to an end. Unfortunately, new fixed-rate deals rose for the third consecutive month to January – and given that the market is expecting more rises in the months to come, we can expect these to keep shifting northwards.”

Propertymark policy and campaigns officer Eleanor Bateman says: “With inflation looking likely to peak higher than previously thought, and the Omicron wave appearing less of a long-term threat, today’s rise had been anticipated by many.

“Some analysts now expect the base rate to reach 1.5% by the end of the year and lenders will of course have factored this into their products already. How quickly the base rate is increased may now depend on factors such as wage growth and electricity prices.”

She adds that rising household fuel bills may lead the Monetary Policy Committee to take a more gradual approach to increase the base rate.

Many of those from across the housing and mortgage industry commented on how this latest rate rise will come as a blow for many households, particularly at times of soaring fuel bills and increasing taxes.

The Building Societies Association, head of the mortgage and housing policy Paul Broadhead points out that eight out of 10 homeowners are currently on fixed-rate deals, while will give some protection. He adds that rate rises will remain “modest” for those on variable rate deals, but said lenders will be “sensitive” to those facing a squeezed household budget.