Mortgage Rates Continue to Impact Housing Market

The UK housing market is still feeling the effects of high mortgage rates, with affordability stretched for many home buyers. According to Nationwide, while earnings have been rising faster than house prices in recent years, this has not been enough to offset the impact of more expensive mortgages.

High mortgage rates are pricing out buyers

The building society said that house price growth had been broadly stable in June, with prices up 0.2% from the previous month. The average house price is now £266,064. Prices were up 1.5% from a year earlier, but Nationwide said external activity in the housing market had been broadly flat over the past 12 months, with transactions down by about 15% compared with 2019.

The lender said the market was still being affected by the increase in mortgage rates, which started climbing after the Bank of England began to raise its key interest rate in late 2021. Robert Gardner, Nationwide’s chief economist, said that mortgage rates are still well above the record lows prevailing in 2021.

Mortgage rates are still well above record lows

For example, the interest rate on a five-year fixed rate mortgage for a borrower with a 25% deposit was 1.3% in late 2021, but in recent months this has been nearer to 4.7%. As a result, housing affordability is still stretched.

The impact of higher borrowing costs can be seen in the fact that transactions involving a mortgage are down by nearly 25% over the past year, Nationwide said. Meanwhile, the number of cash transactions for properties is about 5% higher than pre-pandemic levels.

Across the UK, Northern Ireland saw the biggest price increases, up 4.1% from a year earlier. Wales and Scotland both saw a 1.4% annual rise. Prices in England climbed by 0.6%, with northern regions seeing bigger increases in general than the south.

Regional house price changes

Despite some major lenders cutting their mortgage rates last week, home loan costs remain far higher than pre-pandemic levels. According to financial information service Moneyfacts, the average rate on a two-year fixed mortgage deal stands at 5.95%, while for a five-year deal the average is 5.53%.

The focus is now on the Bank of England’s Monetary Policy Committee (MPC), which sets interest rates, to see if it decides to cut at its next meeting on 1 August. June’s MPC meeting saw a change in tone from policymakers, with suggestions that the Bank could vote for a rate cut next month.

Buyers may find their mojo again with a rate cut

Buyers may find their mojo again when we get a rate cut from the Bank of England, said Sarah Coles, head of personal finance at Hargreaves Lansdown. This could come as early as August, although sticky services inflation and higher wages could mean we need to wait until the autumn.

Either way, we’re not expecting massive overnight drops in mortgage rates, so the reaction is more likely to be a muted upturn in sentiment than an overwhelming wave of optimism.

Last week, the Bank said that about three million households are set to see their mortgage payments rise in the next two years. These are homeowners who arranged mortgage deals before the Bank started to lift rates in 2021. These deals are now expiring, and the Bank said the majority will finish before the end of 2026.

For the typical household looking for a new deal, monthly mortgage repayments are forecast to increase by about £180, or about 28%, the Bank said. However, for around 400,000 households, monthly payments could jump by 50% or more.

Mortgage payments set to rise for millions

Ways to make your mortgage more affordable

• Make overpayments. If you still have some time on a low fixed-rate deal, you might be able to pay more now to save later.
• Move to an interest-only mortgage. It can keep your monthly payments affordable, although you won’t be paying off the debt accrued when purchasing your house.
• Extend the life of your mortgage. The typical mortgage term is 25 years, but 30 and even 40-year terms are now available.

The UK property transactions have seen a significant growth, according to HM Revenue and Customs (HMRC). The number of residential property transactions in the UK surged by 17% year-on-year in May, reaching 91,290. The figure also marked a 2% increase from April, following a 9% drop between March and April.

UK property transactions see significant growth

The housing market has also become a focal point for political pledges in the lead-up to the general election. The Labour Party has committed to building 1.5 million homes over five years if elected, while the Conservatives have promised to abolish stamp duty for first-time buyers on properties up to £425,000 and introduce a new Help to Buy scheme.

The spring bounce, a seasonal increase in housing market activity, has contributed to the growth in transactions. Buyers had been motivated by the greater availability of properties despite higher interest rates.

The spring bounce contributes to growth in transactions