How recent events have affected mortgage interest rates and property prices — and what can you do about it?

On 23 September 2022, the chancellor announced the mini-Budget. To say the last few weeks since have been a bit chaotic would be an understatement. It might seem worrying, but it’s vital to stay level-headed, as a calm response can yield positive results.

American tycoon John D. Rockefeller might have put it best when he dictated his approach to bouncing back from hard times when he said: “I always tried to turn every disaster into an opportunity”.

The mini-Budget might have had a domino effect on different aspects of the economy including interest rates and property prices, and it would be natural to feel stressed about the situation.

By gaining a better understanding of the state of affairs, making any necessary changes to your plans, and seeking professional advice, you could leave yourself better off in the long term.

Read on to learn about the mini-Budget’s effect on the mortgage and property markets and discover a few ways you can work to protect your assets and stay on track to meet your long-term goals.

The mini-Budget has caused interest rates to soar and property price growth to slow down

The mini-Budget detailed several major tax cuts as well as an increase in government borrowing. The chain reaction it set off saw a mass sale of government bonds, also known as “gilts”, and a fall in the value of the pound.

The volatility forced the Bank of England (BoE) to step in to reassure markets, shortly followed by an announcement by the chancellor that the government were no longer going to pursue abolishing the 45p rate of Income Tax.

However, much of the damage was already done. The mortgage market had been severely disrupted, as lenders moved to withdraw products and replace them with more expensive deals.

According to the Financial Times, the IMF forecasts that UK inflation levels will likely remain high going into 2023, as they predict the country to have the highest levels among the G7 by the end of next year.

As a means of combating high inflation, the BoE has raised the base rate to 2.25% (as of 13 October 2022), and interest rates are expected to continue to rise later this year.

The combined result of the aforementioned volatility is an increasingly expensive and prohibitive mortgage market and a drop in housing prices that according to the Telegraph could dip by as much as 15% in the next two years.

For a more in-depth look at the mini-Budget read our article on the subject.

It is a daunting landscape for someone with property or for an individual seeking a mortgage for a new home. However, it’s important not to panic!

Remember: a calm approach could see you navigate any short-term instability and emerge in a good position in the long term.

Mortgage rates might be rising but there are options available to proactive individuals

Firstly, if you have a fixed-rate mortgage you can probably breathe a sigh of relief as short-term instability won’t affect your mortgage just yet. Although, you should make sure you’re aware of when any fixed-rate period ends and prepare accordingly.

If you have a variable- or tracker-rate mortgage, or if you’re a first-time buyer trying to get on the ladder, the recent rises in the base rate will likely have a knock-on effect on your mortgage payments.

Moneyfacts updates its record of mortgage rates on a daily basis. As of 13 October 2022, it reports best rates of 4.2% (two-year fixed) and 4.04% (five-year fixed) for first-time buyers, and 4.87% (two-year fixed) and 4.21% (five-year fixed) for remortgaging terms.

This is a considerable rise compared to a year ago when Moneyfacts reported average fixed rates on two- and five-year terms as 2.25% and 2.55% respectively.

As a first-time buyer, these increases will likely shape your decision making in the near future.

You might want to consider factors such as:

  • If it would be more beneficial to agree a mortgage now, as interest rates are expected to continue to rise, and any future agreement is likely to be more expensive
  • If you should wait to see how the mini-Budget and the looming recession affect property prices. If the housing market dips considerably, it could make any property acquisitions more feasible (current average housing prices are 9.8 times the average UK salary)
  • If it you would be better off shelving plans in the short term and instead opting to invest any funds you’ve set aside, hopefully see some growth over time, before re-evaluating the housing market down the line.

As a current property owner with a variable- or tracker-rate mortgage you will have different options in front of you.

Firstly, you may want to consider remortgaging to more secure fixed-rate terms. However, you should be aware that available options are diminishing.

According to the Guardian, lenders pulled more than 40% of packages from the market following the mini-Budget announcement, limiting the variety of deals you might be able to pursue, although options are slowly returning to the market.

Secondly, if you have the benefit of unused surplus savings, you may want to consider overpaying on your mortgage payments in the short term before rates rise any further and in doing so save yourself money on your overall payments in the long term.

Housing price increases begin to slowdown as rising interest rates see a reduction in borrowing

The rules of supply and demand provide a simplified way of forecasting movements in the housing market. As interest rates rise, it becomes more difficult for borrowers to gain financing. Consequently, there are fewer interested buyers on the market, and prices typically begin to drop.

According to the Guardian, growth on the UK housing market slowed for the third consecutive month in September as surveyors predict that the UK housing boom of the last 13 years will come to an end in 2023.

As previously mentioned, the UK housing market is forecast to see average prices drop by as much as 15% in the next two years.

So, the dilemma facing existing property owners is whether to stick or twist. As we said at the start, it’s important to stay calm. You shouldn’t make emotional investing decisions. The logical move is to review your financial situation, seek professional advice, and learn from historical data.

The housing market has crashed twice in the last 30 years, firstly in the early 90s and then as a result of the global financial crisis in 2008. In both instances, prices dropped in the short-term but eventually rebounded and resumed their upwards trajectory.

According to Statista, house prices averaged £157,200 in early 2009 following the market crash. But by early 2013 prices had begun to rise again and, according to data from the Office for National Statistics (ONS), UK average prices reached £292,000 in July 2022.

Property is a long-term investment and if history is a reliable indicator, it may be worthwhile holding onto your asset and reviewing any possible sale when markets begin to rise again in the future.

Get in touch

If you’re still in doubt about recent events, read our article about the importance of staying calm during economic uncertainty.

It is important to assess all your available options before making any major decisions. A good first step is to pursue professional advice on your property situation by emailing or calling us on 0345 505 3500.

Please note

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.

Think carefully before securing other debts against your home.

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.