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What would an increase in interest rates mean?

Posted on Thursday, June 1, 2017

In the residential property world, the most important macroeconomic indicator we're obsessed with is interest rates. Interest rates are the main tool the government uses to cool down the market when it shows signs of overheating. They have a massive impact on the housing market because they determine what your mortgage costs every month.

In the last housing cycle (between 2000 and 2008) interest rates steadily rose from about 4 per cent to nearly 6 per cent and then fell to 0.5 per cent after the credit crunch, falling again to 0.25% after the Brexit vote. They were lowered in order to stimulate the economy by keeping money out of savings accounts and into circulation.

But what would happen to homeowners in Ealing if interest rates rise? We should start by saying we don't expect the Bank of England will do anything to risk the economy during Brexit, however there is a chance that the increased prices manufacturers have to pay owing to the low value of the pound might turn into inflation and require a rate rise.

One of the fundamentals of economics is that the value of a currency is a measure faith in its home country's economy. When the value falls, imports becomes more expensive (and vice versa). We import a lot to the UK and this means the costs of raw materials goes up for manufacturers - which could lead to price rises.

Here is one possible scenario. In Ealing the average price of a 3 bed home is £662,100. On a 65% mortgage with a 4% rate this will cost about £1,865 per month once we add in the fees and flatten out the amortisation. If the base rate rose to 6% (the highest level since 2000) then according to our calculations that would translate into an extra £717 per month.

So the bottom line is that we don't foresee anything happening to interest rates any time soon, and even if they did rise, the increased monthly payments would be unlikely to unsettle the market dramatically - and inflation would erode debt. If you want to talk about buying or selling a home (now is a fantastic time by the way), give us a call.