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UK house prices: how interest rates will affect property and mortgages

UK house prices: how interest rates will affect property and mortgages

The decision by the Bank of England to raise interest rates to the highest level in 15 years will boost mortgage payments for millions of homeowners.

On Thursday, the Bank confirmed that UK interest rates would rise for the tenth consecutive year, to 4 per cent from 3.5 per cent, in a bid to control inflation after hitting a record high of 11.1 per cent in October.

The bank faced a tough challenge on what approach to take as higher mortgage costs sent the housing market through five consecutive months of falling house prices.

The IMF said this week that the UK will be the only G7 member whose economy will shrink this year, possibly by 0.6 percent. While this would normally lead to interest rate cut calls, the current inflation rate of just over 10 percent forces the Bank to act within its mandate to bring it back to its 2 percent target.

Below we look at how the recent interest rate hike could affect the housing market for both buyers and borrowers.


After big gains in 2022, the average property price in January was £258,297 – down 0.6 per cent from December and well below last year’s £281,000.

House prices stalled in September, followed by monthly declines of 1.0 percent in October, 1.2 percent in November and 0.3 percent in December.

Further falls are likely now that the Bank of England has approved an interest rate hike for the 10th consecutive year as it is likely to push mortgage rates further up.

Higher mortgage rates tend to drive home prices down because people are less likely to borrow money.

On Thursday, major lender Santander warned that house prices would fall back to 2021 levels.

The Spanish group predicts a 10 percent drop in house prices this year as interest rate hikes dampen demand.

House prices are falling, but mortgages are rising

(PA wire)


Mortgage rates offered by lenders jumped in the aftermath of last year’s mini-budget, and the cost of borrowing also rose as the Bank of England’s base rate rose.

This resulted in a sharp decline in the number of mortgage approvals. The bank said on Tuesday that 35,000 had been given the green light in December compared to 46,000 in November, the lowest number in the UK since 2009.

UK Finance estimates around 715,000 tracker mortgage borrowers will feel a pinch when interest rates rise again. Households are estimated to pay an average of around £588 more a year as a result of the bank’s announcement.

In addition, the Office for National Statistics predicts that more than 1.4 million households will face interest rate hikes when they renew their fixed-rate mortgages this year.

There have been a series of increases in base interest rates over the past year, but borrowers with fixed-rate mortgages have been shielded from their direct impact. Analysts said some may be shocked when it comes to renewal.

Labor says homeowners could face mortgage increases of up to £14,000 a year as they exit low-fixed-rate deals, further deteriorating living standards.

Analysis by the party shows the projected annual increase in the cost of buying a home with an 80 per cent mortgage in every UK constituency.


Downing Street has admitted a rate hike could be “difficult” for mortgage holders.

The Prime Minister’s official spokesman said: “Inflation is the biggest threat to living standards in a generation, which is why we are today supporting the Bank’s efforts to help us halve inflation this year.

“We will continue to make the hard decisions needed to do everything we can to bring inflation down, including not funding additional spending or tax cuts through loans that only serve to fuel inflation further and prolong the pain for everyone.”

A spokesman added: “This is a difficult time for UK mortgage holders. As the chancellor said, sound money and a stable economy is the best way to lower mortgage rates and reduce the cost of paying down a mortgage.

“That’s why we’re taking the necessary and responsible action to halve inflation, reduce our debt and boost economic growth.”

Bank of England governor says inflation likely to fall ‘quite quickly’ starting in late spring as he indicated ‘corner has been turned’

(PA wire)


Robert Gardner, Nationwide’s chief economist, said: “There are some encouraging signs that mortgage rates are normalizing, but it is too early to tell whether housing activity has started to pick up.

“The decline in home purchase approvals in December, reported by the Bank of England, largely reflects the sharp fall in mortgage applications following the introduction of the mini-budget.

“The market will struggle to regain much momentum in the near term as economic headwinds remain strong, real wages are likely to fall further and the labor market is widely expected to weaken as the economy contracts.”

North London estate agent Jeremy Leaf added: “Fizz has certainly left the market, leaving behind more serious needs as opposed to discretionary buyers, coming to terms with more stable mortgage rates and a better balance between supply and demand.

“Looking ahead, the outlook for house prices remains fairly stable and no dramatic changes are expected.”


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