The Bank of England last week hiked interest rates by 0.5 percentage points – pushing the benchmark rate to 4% up from 3.5%.

Soaring inflation in addition to surging energy costs and a severe cost-of-living crisis are significantly affecting prospective homebuyers and their ability to enter the market.
While homeowners with mortgage deals that are set to expire will experience a rude awakening following the announcement. The rate was already at its highest level for 14 years. 

When interest rates rise, around 1.6 million people on tracker and variable rate deals will see an immediate increase in their monthly payments. The increase of 0.5 percentage points means that homeowners on a typical tracker mortgage will pay around £49 more a month as those on standard variable rate mortgages face a £31 increase.

Properties in the UK now stand at their most unaffordable level since 1899, with figures released by the ONS showing that the average home sold in England cost the equivalent of 8.5 times the average annual disposable income – which is the worst affordability ratio in England since records began in 1999. The average price of a property fell by 0.6% in January to £258,297, according to Nationwide.
 

First step

The picture looks bleak, but one property expert believes 2023 will see a turning point in the housing market.

David Hannah, Group Chairman of Cornerstone Tax, told Introducer Today:  “Despite the Bank of England’s decision to raise interest rates by 0.5% to 4%, I believe that we have now reached the peak of inflation and will soon see a return back to normality in the not-so-distant future. 

“However, in the short term, last week’s announcement will have a material effect particularly on first-time buyers who may now be unable to make a first step onto the housing ladder due to unaffordable mortgage rates. This will also be a cause for concern for those who are coming to the end of a fixed-term deal as their repayments will also increase. 

“It will have a knock-on effect on the rental market too – it has already been suffering from a lack of supply, and now, with a growing number of would-be buyers in need of a place to live, this is going to be exacerbated further. The result of this is that rental prices and competition will likely increase at a time when people are already struggling. With all of this said, my outlook for the second half of this year is much more positive and I think mortgage rates will fall alongside inflation which should bring affordability back to more normal levels.”