How are mortgage and interest rate rises impacting house prices?

There have been a lot of headlines about interest rate and mortgage rate rises in the past few weeks.

The Bank of England has now raised the Base Rate 13 times since December 2021. It’s now at 5%, which is the highest it’s been in 15 years. The recent rate increases have been made because inflation has stayed higher than expected.

This has also been pushing up mortgage rates, and estate agents are reporting that some home-movers are pausing their plans while they assess what higher costs mean for their budgets.

The increasing affordability challenges of home-buyers has meant that some new home sellers have adjusted their asking price expectations. This is why we’ve seen the average asking price of a home in Great Britain drop this month by 0.2% (-£905) to £371,907. This is slightly below the 0% norm for this time of year, and follows a drop of £82 in June. You can read our July House Price Index in full here.

House prices have proved more resilient than most expected during the first half of the year, and are now 2.6% higher than in January. Demand from home-buyers is still higher than 2019’s more normal market level, however, rate rises have impacted the number of home sales agreed in June.

Our property expert Tim Bannister says: “The Base Rate rises are now beginning to bite in the housing market. While asking prices and home sales bounced back this year more strongly than most expected, the unexpectedly sticky inflation figures, and the surprise of further mortgage rate rises, have contributed to the fall in average house prices and number of sales agreed.

“However, first-time buyers, trader-uppers and downsizers with higher deposits and lower mortgage requirements appear to be still keenly searching the market, not wanting to miss out on the right property that is not over-priced and that they can still afford,” he adds.

New home-sellers adjust asking price expectations

Some home-movers are putting their plans on hold until there is more certainty that mortgage rates have stabilised. However, there is still a large volume of motivated home-buyers who can factor rate rises into their budgets and are continuing to enquire about homes for sale.

Estate agents are reporting that homes that are realistically priced are still attracting motivated buyers due to the shortage of property for sale compared to historic norms.

Homes that need a reduction in asking price are more than 10% less likely to find a buyer than those that were priced right from the start. With the chances of selling already lower due to current market conditions, initial over-pricing reduces those chances markedly further.

Tim says: “Sellers who price right the first time, rather than starting with too high an asking price only to reduce later, have a much better chance of attracting one of these motivated buyers, and a good local estate agent will provide sellers with accurate evidence of prices that are being achieved in their area.”

What’s happening with mortgage rates?

Our mortgage tracker shows that the average rate for a five-year fixed, 85% Loan-To-Value mortgage is now 5.69%, up by 0.49% compared to this time last month. But this is still below the average rate following the sudden shock of the mini-Budget announcements in October, which was 5.89%.

The current view is that rates will have to go higher to address inflation in the short term, but the financial markets still believe they will fall back in the long-term.

You can keep an eye on the current UK mortgage rates for different deposit sizes here and check how they compare to last week’s average rates.

If you’re thinking of moving, a mortgage broker or adviser can talk through your specific circumstances to help determine the best lender for you, as well as explaining the type of mortgage that might be the best fit.

You can also apply for a Mortgage in Principle online, to give you an idea of how much you could borrow. It’s quick, free, and your credit score won’t be affected.

READ MORE: What are the current UK mortgage rates?

The header image for this article is provided courtesy of Andrew Grant, Covering the West Midlands