In January, the Bank of England raised interest rates again in an effort to control the economy. The measure came in the face of high inflation, rising almost 5% in 2021.
Why are interest rates rising?
This is the standard practice of the Bank of England, so shouldn’t come as a surprise. Even so, the extent of inflation and the corresponding jump in interest rates is unprecedented in recent years.
Higher interest rates can be a good thing for the public. Savers can get better returns from their saving accounts since any rises and falls tend to transfer to high street banks.
In fact, this is the exact reason why the Bank of England increases interest rates. Its intention is to encourage high street banks to increase theirs also.
By giving individuals and businesses a greater incentive to save, the hope is that they will likely spend less money. With a lower population active in the market, hiking up prices will no longer be viable for vendors – stalling the rise of inflation.
What does this mean for the housing market?
However, this saving opportunity for the public comes at the price of more-expensive borrowing. Interest rates apply to forms of credit, such as credit cards and all forms of bank loans. Higher interest rates on credit mean that borrowers will pay more in the long run, as their initial loans compound at a faster rate over the term of their loan.
For many people, mortgages are the largest form of credit that they will ever borrow. So, it’s no surprise that this area will feel a significant impact from the rise of interest rates.
For those with “tracker mortgages”, whose variable rates are tied to the Bank of England base rate, this is bad news. It means a lower portion of their borrowed capital will be cleared with each monthly payment since a larger amount will disappear paying off interest. On the other hand, borrowers with fixed-rate mortgages won’t suffer until their current term expires.
What do rising interest rates mean for new buyers?
Housing prices are still significantly higher than they were at the beginning of last year.
Mortgages and deposits will pose a greater challenge to prospective homeowners. Adding this to the higher cost of living, new buyers will find it more difficult to reach higher target sums with less of their paychecks left to contribute towards them.
On top of this, homebuyers still unknown face costs such as conveyancing fees. However, this much uncertainty can be resolved with help from online quote building services.
With greater challenges building up the initial sums needed to enter the market, those looking to buy their first property are set to feel the influence of inflation and interest rises most keenly.
