Photo credit: Alicja Ziaj on Unsplash
August was off to a great start for those patiently waiting for an interest rate cut in recent months as the Bank of England (BoE) decided to reduce the base rate by 0.25% to 5.0%. This marked a significant milestone since it was the first cut since the start of the COVID-19 pandemic, and of course, was a positive sign that chief economists believe the UK’s economy is on a promising trajectory following the rapid fall in inflation. This is especially apparent due to inflation meeting the target rate of inflation which is currently set at 2%.
So, what is the BoE base rate?
Put simply, the Bank of England base rate is the interest rate at which the central bank lends to commercial banks. It serves as a benchmark for various interest rates across the economy, which has a strong influence on borrowing and lending rates for both consumers and businesses.
Changes to the base rate are usually actioned in response to inflation figures. For example, when too much money is sloshing about in the economy and inflation is running high, interest rates are increased to limit the spending power of consumers and encourage them to save. Savers tend to benefit from higher interest rates as they earn more money from their bank on any funds that they have.
What is the impact on the property sector?-
Depending on your position within the market, you will be impacted differently.
Let’s look at renters for example.
Your landlord is paying a mortgage on a low interest rate, and they charge you your rent according to their payments, suddenly interest rates rise rapidly, and they pass on the cost to you, the renter. This means rents increase and you, the renter, are directly impacted. Of course, not all landlords will pass on the cost, some absorb it either in full, or partially, and not all landlords even have a mortgage!
Now let’s look at buyers.
Example profile:
Property price – £350,000
Deposit – 10% (£35,000)
Loan – £315,000
Term – 30 years
Interest rate 2%
Total Payment – £1,165 per month
Now, if we change the interest rate to 5% then the total monthly payment will stand at £1,692!
This is deliberate. The decision-makers aim to reduce the demand for goods, as consumers simply cannot afford them. This means that those selling the goods cannot inflate the prices any further, helping to curb the overall inflation rate.
As homeowners look to purchase a property, they can no longer afford that £350,000 home which means that they need to look for cheaper properties. This means that the growth of house prices rapidly decreases. Why? People are no longer benefiting from cheap credit which the banks have been used to providing over the past 15 years since the 2008 economic crash.
In fact, an article from October 2023 in The Guardian shows exactly how high interest rates have impacted house price growth. UK house prices are rising at the slowest rate for this time of year since the 2008 financial crash, according to new data that highlights the impact on the housing market of higher interest rates.
Overall, the cut in interest rates is a positive sign for 22% of Brits who currently have a mortgage and are concerned about the impact that higher rates will have on their household outgoings.
We will keep you updated in our newsletter, blog posts, and social media if there are any more changes!
If you’re feeling confused and not quite sure about what you should be doing, make sure to get in touch!
