Recent changes in the UK property market have seen a drop in house prices and mortgage approvals, which can be attributed to a decline in mortgage rates. This article aims to explain the current situation for current and potential homeowners who are struggling to select a suitable mortgage deal.
House Prices Fall Due to Higher Mortgage Costs
The COVID-19 pandemic had caused rapid growth in house prices due to various factors, such as stamp duty cuts, low-interest rates, and the desire for more living space. However, the situation began to change in the second half of 2022 when interest rates started to rise. This, combined with the cost of living crisis, led to higher mortgage rates, which have impacted the housing market. Data from house price indexes is mixed, with some showing signs of recovery, while others record a slowdown.
According to Nationwide’s latest house price index, house prices increased by 0.5% in April, which is a tentative sign of recovery. However, the number of seasonally adjusted UK residential transactions fell 19% YoY in March 2023, according to HMRC’s latest data. Additionally, Rightmove’s latest house price index showed that the prices of properties coming to the market rose by just 0.2% in April, far lower than the 1.2% average for this time of year.
Sellers are taking discounts of up to £14,000 to re-price their homes realistically to secure a sale as the market cools. Meanwhile, affordability is the number one barrier to homeownership in 2023, with inflation still high, and house prices being inflated above pre-pandemic levels. Prospective buyers may be delaying their property-buying journey and holding onto their deposits until living costs are under control. The hope for higher sales and more people owning their own homes relies on a higher volume of buildings and ensuring that these properties are affordable.
Mortgage Costs in 2023
The Bank of England has raised interest rates to tackle soaring inflation, driven by the high cost of energy. The usual motive for hiking rates is to encourage consumers to save more by providing better returns on their savings. Raising rates also makes borrowing more expensive, including loans and mortgages, which should slow the rise in everyday goods. If interest rates rise, mortgages will become more expensive, with lenders typically passing on the increase to their customers through higher monthly payments. Those with fixed-rate mortgages won’t see any change in their rate or monthly payments until their plan ends, while those with tracker mortgages will see their rate and payments increase with any increase in the Bank of England rate. A small increase in the Bank Rate can significantly increase monthly mortgage costs. For example, if the Bank of England raises interest rates by 0.5%, that would add £56 a month to a 25-year £200,000 mortgage for those on a tracker mortgage deal.
Interest Rate Forecast for 2023
According to forecasts, the Bank of England is expected to cut its base rate from the current 4.25% to 3% by the end of next year, followed by a further cut to 2.5% by the end of 2025. This is a significant decline, but it still represents rates rising faster than they are falling. The Bank of England has raised its base rate on 11 consecutive occasions since December 2021 when it stood at 0.1%. The market expectation was that the base rate would peak at 4.5% in the coming months, but the decision by the Monetary Policy Committee to raise the base rate last month could be the penultimate hike in the tightening cycle. The speed of inflation’s decline will determine how much further interest rates need to rise, with concerns that wage growth could add to inflationary pressures. The expectation is that the Bank will raise interest rates from 4.25% to 4.5% in May, although this will depend on March’s CPI inflation data. The economy has continued to be resilient, but there is still some evidence that inflation pressures are easing. Therefore, interest rates may not need to rise much further, and the most likely scenario is that interest rates rise from 4.25% now to a peak of 4.5%, stay at 4.5% for the rest of this year and then be reduced next year to 3%.
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Will mortgage rates go down in 2023?
According to the IMF, recent increases in real interest rates are likely to be temporary, and advanced economies’ central banks are likely to ease monetary policy and bring real interest rates back towards pre-pandemic levels once inflation is brought back under control. This could bring relief to mortgage borrowers who have seen their monthly repayments increase due to rising rates. However, trying to guess the path of interest rates is not advisable, as it is out of most people’s control and an unknown quantity in the decision-making process. Instead, financial experts recommend focusing on factors that are within their control, such as whether they can afford to see their mortgage payments increase if interest rates rise and if they plan to move or borrow more in the next few years. Fixed rates are still slowly creeping down, with some lenders offering rates below 4% on low loan-to-value products, and buy-to-let rates are also lower than they have been in the past six months.
Choosing Between a Tracker or Fixed Rate
There is no definitive answer when it comes to choosing between tracker or fixed-rate mortgages, as both have their advantages and disadvantages. Borrowers who opt for variable tracker rates may see their monthly repayments increase or decrease based on changes in the Bank of England base rate. Those on fixed rates, on the other hand, can maintain the same mortgage payment for the entire term of the loan, regardless of changes in the base rate. It is essential to select the mortgage type that best suits your current and future affordability.
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Conclusion
To sum up, current trends in the UK property market are due to mortgage rate fluctuations, and while it is predicted that the mortgage rates will continue to decrease throughout 2023, the rates may vary among lenders. Borrowers must choose the type of mortgage that best fits their affordability and financial goals.