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Expected Bank of England interest rate rise unlikely to have major impact on property market

With the Bank of England expected to announce an interest rate rise this week, the very latest research has found that first time buyers are not concerned and industry experts, including lenders, also feel the impact will be minimal.

The decision of the Bank’s Monetary Policy Committee is expected to be announced at noon tomorrow (Thursday 02 November) and it has been widely predicted that there will be a small rise from the current historic low of 0.25%.

One the one hand, it will be the first time that there has been a rise in rates for a decade, but on the other hand there is a whole generation of home owners, including buy to let landlords, who have known nothing but low rates on their mortgages.

Those with fixed rate mortgages will not be affected until their loan is up for a renewal, but those on the standard variable rate will indeed see their monthly costs rise, albeit by a very small amount.

Some lenders have been withdrawing their ultra-low interest rates on mortgages in recent weeks in anticipation of an interest rate rise, but others, most notably the Nationwide, have actually announced even lower rates. What products will be available in the next few days may amount to a lottery in terms of finding the lowest.

Research from the Yorkshire Building Society shows that potential first time buyers say a rise in interest rates is unlikely to prevent them from getting a foot on the property ladder with just 8% of would be home owners aged 18 to 40 saying it could hinder their plans.

Indeed, the research found that saving for a deposit is far more of a hindrance with 44% giving this as a reason preventing them from buying and 33% concerned about the cost of property in their local area.

The Yorkshire Building Society Group, which includes intermediary only lender Accord Mortgages, has seen a surge in the number of borrowers seeking fixed rate mortgages over the last three months, suggesting they want to lock into low rates before any rise.

‘The mortgage market has been in unchartered territory for many years now and even with the prospect of rates rising it’s pleasing to see that many aspiring home owners still believe owning their own home is in reach,’ said Mike Sims, senior mortgage manager at Yorkshire Building Society.

Robert Gardner, chief economist of lender the Nationwide, does not believe that a modest rate change will have a huge effect. ‘Providing labour market conditions do not weaken significantly, the impact of a small rate rise on most UK households is likely to be modest,’ he said.

‘The proportion of borrowers directly impacted by a rate rise will be smaller than in the past, in part because the vast majority of new mortgages in recent years were extended on fixed interest rates,’ he pointed out.

He explained that the share of outstanding mortgages on variable rates, and which are therefore likely to see an increase in payments if the bank rate is increased has fallen to a record low of around 40%, down from a peak of 70% in 2001.

‘Moreover, a 0.25% increase in rates is likely to have a modest impact on most borrowers who are on variable rates. For example, on the average mortgage, an increase of 0.25%
would increase monthly payments by £15 to £665, equivalent to £180 per year,’ said Gardner.

‘That’s not to say that the rise will be welcome news for many borrowers. Household budgets are under pressure from the fact that wages have not been rising as fast as the cost of living. Indeed, in real terms after adjusting for inflation, wage rates are still at levels prevailing in 2005,’ he added.

Russell Quirk, chief executive officer of eMoov, believes that the housing market is showing defiance in the face of political, financial and economic challenges and has outperformed wider negative predictions.

‘With a slow but consistent recovery from such detrimental proceedings as the European Union referendum and the shambolic snap election, it is unlikely that any marginal increase in interest rates that may come this week will stifle this growth,’ he said.

‘Not only will any rates rise seen this week be financially palatable for UK home owners, a swelling population both domestic and from abroad, coupled with a severe lack of building stock being built, will see prices remain inflated to do the imbalance between supply and demand,’ he added.

Similarly, Jonathan Hopper, managing director of Garrington Property Finders, does not think that a modest rise in interest rates is likely to be detrimental. Indeed he said that in the short term it could give the market a lift as buyers rush to lock in a favourable rate.