The reality of the interest rate increase
When the Bank of England voted by 7-2 to increase interest rates from 4.0% to 4.25%, its 11th consecutive rise, you could almost hear the collective sigh of potential homebuyers and the tapping of calculator keypads, as they tried to work out how much extra this was going to cost on them on their monthly payments. The bit the news media did not tell you about was that within 30 minutes of the announcement, the UK’s second and third largest mortgage lenders, Nationwide and Natwest, both reduced fixed rates, with Nationwide by up to 0.45%, potentially knocking hundreds of pounds off customers monthly mortgage payments.
The difference in the media and the market
This highlights a common problem with how the media portrays the housing market. While it's true that the housing market can indicate our country's confidence, the media often sensationalises and casts a negative spin on almost every event, without ever looking beyond the headlines. Fixed-rate mortgages, which most people in the UK choose, are not directly impacted by the Bank of England rates. Instead, they are more closely impacted by Interest Rate SWAPS, which predict where interest rates might be in two, three, or five years' time. This SWAPS market has already factored in these interest rate rises and many more, following the ill-fated mini-budget of September last year.
The future outlook
Fortunately, we have now entered into a far more stable environment, both politically and economically. It now seems unlikely that the Bank of England will need to raise rates to levels previously considered necessary and it transpires that our economy, our housing market and the British people are a lot tougher than our media and City markets would give them credit for. A recession now seems unlikely and with forecasts of inflation coming back to under 2% in the end of the year forecast by Goldman Sachs, the second half of the year is looking far more positive. March has seen an uptick in property activity levels and it’s no surprise with mortgage rates now available commonly below 4% if you have a decent level of deposit.
Even the investors in the housing market, having felt the pressure of more restrictive tax laws and stress tests combining to pressurise the beleaguered landlords, are now seeing much lower mortgage rates and improved calculations. My positive prediction is that now is probably a great time to buy, as confidence returns to the market, with the potential for rising prices again later this year as the economic environment further improves.
Mortgage Services Director
Capital Private Finance