Mortgage rates rise again - Rishi Sunak tells homeowners to hold their nerve.

The Bank of England’s Base Rate Increase: What It Means for the Housing Market and Homeowners 

The Bank of England has recently announced an increase in its base rate from 4.5% to 5%, the highest it has been since 2008. This is the latest move in a series of rate hikes aimed at curbing inflation, which has been running higher than the Bank’s target of 2%. 

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly. 

The government and banks have come under pressure to help homeowners weather these rising mortgage repayment rates. After a key meeting with lenders, Jeremy Hunt unveiled new measures including the ability for homeowners to talk to their bank or building society without it affecting their credit score. Banks and building societies have also agreed to implement a 12-month minimum term before repossessing homes. 

These measures are aimed at providing some relief for homeowners struggling with rising mortgage costs. However, it remains to be seen how effective they will be in mitigating the impact of rising interest rates on the housing market. 

Are we going to see a market contraction and by how much?  

Well that all depends on how the current interest rates affect affordability. 6% mortgage rates are not a new thing, most mortgage applications are stressed tested at 8%. Even those that borrowed when rates were at their historical lows of 0.8-2% over the last 3-4 years were tested against this rate.  

The issue lies in a lack of wage growth in line with inflation and interest rate hikes. The average UK salary is £26,500. If you were being paid this in 2019 you would need to be on £35,137 today just to have kept up. In the same period the cost of goods and services has increased a whopping 32.6%. None of this is taken into consideration when your mortgage was stress tested at 8%.  

Those that borrowed when rates were below 1% are going to struggle the most. Given that their 5yr rate deals are due to expire this year the outlook isn’t great especially if they borrowed at the top end of their budget.  

As these fixed terms come to an end, we should start to see a lot of properties come back to the market which in turn will influence prices. The deciding factor in how far prices fall will be hugely affected by the support of lenders and how far that goes. 

If lenders back their homeowners and stick with their commitments to implement 12-month minimum terms before repossessions it could be the silver lining that sees homeowners make it through this. If not, it could be the straw that breaks the camel's back. Without the help to weather this storm we could see a lot of repossessions and property owners needing to sell.  

Only time will tell but for the moment Rishi Sunak recommends "holding your nerve".