After more than a decade, the Bank of England increased interest rates in 2017 and another interest rate increase in expected around May 2018. Here, we take a look at how it will affect homeowners, prospective investors, and savers.
Very few homeowners understand what the increase in interest rate will mean for them; however, while the increase from 0.25% to 0.5% in base interest rate by the Bank of England may not be too large, it still means a lot for property owners and those interested in getting on the property ladder.
Mortgages would go up – For prospective investors in the property market or those who currently have a running mortgage, one of the results of the increase in interest rate will be that mortgage prices will go up. However, this increase will not affect people who are currently on the fixed rate; their monthly repayments will remain the same regardless of the increase in price. But there are homeowners who are on the variable rate deals and an increase in interest rate will bring about a commensurate increase in mortgage payments. This is why it is always advisable to seek expert mortgage advice before going for a mortgage deal. Some homeowners may be in for a shock if they cannot secure remortgaging and find themselves at the receiving end of a standard variable rate.
Housing prices will be affected – Any form of interest rate increase will have an effect on the housing market. For one, it will affect buyer confidence. On one hand, Investors will be under pressure to find a house fast so that they can cash in on any increase in rental fees, while on another hand, others would be a bit more laid back, watching to see how the wind will blow. “The increase in prices will be very pronounced in certain locations while in others, it will be almost indiscernible” suggests housing experts, The House Shop.
However, if you take a look at the broader picture to see the effect of an increase in interest rates on the prices and sales of homes, you will realize that an increase in interest rate more often than not is followed by a corresponding increase in home and rental prices. This holds true more for buy to lets properties as landlords usually have an interest-only mortgage instead of the repayment system used by regular homeowners. Note that 0.25% increase on a £200,000 buy to let – interest-only mortgage will result in a £40 extra per month as against the £25 on a repayment mortgage plan.
Savers may gain – A hike in interest rate normally results in an increase in mortgage rates, but when this happens, banks tend to reciprocate with a subsequent increase in the savings rate. The truth is that while savers may actually see some improvements, it may likely not make up for the increase in mortgage repayments that have to make. That being said, savers are likely to expect a bit more returns on the savings although a lot of them will still continue to earn around 1% interest on an individual savings account.
