UK housing market – good time for both sellers and buyers but hurry

According to data from the Bank of England, UK mortgage rates rose at their fastest pace for a decade in the six months to May, fuelling expectations that the country’s housing market is cooling after a pandemic-induced boom. 

According to last week’s figures, the average interest rate on new mortgages increased by 13 basis points to 1.95% in May. This is 46 basis points above the rate in November, making it the fastest six-month increase since 2012. 

The average quoted rate for a two-year fixed-rate mortgage with a 75% loan to value ratio surged to 2.63% in May, from a low of 1.2% eight months earlier. This is the fastest increase over such a period since records began in 1995. 

The rate on existing mortgages also increased by 2 basis points to 2.07% in May. Providers are passing on the interest rate rises implemented at the BoE’s last five meetings. 

The Bank of England is expected to continue to raise rates from their current 1.25% to 3% by February next year as the central bank confronts the fastest pace of inflation in four decades, suggesting the housing market will soon lose its momentum.  

With interest rates rising and the cost of living soaring, experts predict that from the end of next year house price growth will drop from its current 10% into negative territory and will contract through 2024. 

Rising mortgage rates coupled with record house prices mean the share of new buyers’ incomes devoted to monthly mortgage repayments “will rocket,” experts predict. 

Nationwide data show that payments have already risen relative to pay, reaching 32% in the second quarter of this year, up from 27% in the third quarter of 2020. 

Homebuyer numbers are expected will dwindle in the second half of this year, as a result of the intense pressure on households’ disposable incomes from the jump in the cost of essentials, and the current record low level of consumer confidence. 

For the time being, however, house prices are supported by the UK’s strong labour market, low housing supply and by buyers rushing to secure mortgage deals before rates rise even further. 

With the prospect of higher mortgage rates on the cards, buyers are taking advantage of the last remaining lower rates before the inevitable spike, with those remortgaging desperate to lock into a fixed-term mortgage for as long as possible. 

Bank of England data show that net mortgage borrowing rose to £7.4bn in May, up from £4.2bn in April, and above the £4.3bn 12-month pre-pandemic average to February 2020. 

The same data also show that approvals for house purchases rose to 66,200 in May from 66,100 in April — only slightly below the pre-pandemic average of 66,700 in the 12 months to February 2020. 

This is how Andrew Montlake, Managing Director of Coreco, a leading London mortgage broker, summarized the current state of the market: 

 “A lot of people want to buy before rates rise even further and the fear of missing out on the rates currently available is incentivising a lot of people to take action”. 

“Rates are rising at a rate of knots and people are getting in while they can, and fixing for as long as they can, whether through a house purchase or a remortgage. People who have been procrastinating are now very proactive”.