Brexit dominates everything that’s happening economically, not least the prospects for interest –- and hence mortgage rates. But under a rough or smooth Brexit, interest rates are bound to rise.
Under a no-deal Brexit, interest rates would have to rise to contain inflation caused by a lower exchange rate and tariffs on imported goods. But even under a smooth one, the performance of the UK economy means rates will rise, too.
In its latest forecasts, the Bank of England has factored in three increases in rates between now and 2023, bringing the bank rate up from 0.75% now, to about 1.5%. These projections were made without taking into account the additional boost to the economy from public spending announced in the Budget. So, we should perhaps expect rates to reach 2% by the same date.
What will a rise in interest rates mean for property sales?
A higher bank rate will clearly affect mortgage rates and hence the cost of home buying. However, with rates still at such low levels, even after a rise of up to 2%, mortgage borrowing is still very affordable by historic standards. And mortgage lenders are not passing on the full impact of rate increases.
The margin between bank base rate and mortgage rates have been falling -- most notably at the higher loan-to-value end of the market. That bears down yet further on mortgage rates making this a good time for home buyers.
The reason for that is the high levels of competition in the market for the low levels of available business. Mortgage approvals have been broadly unchanged since mid-2016 and home sales are still at very low levels.
Total numbers of house sales per month have averaged just 98,000 in 2018 compared with 102,000 per month in 2014 and 135,000 per month before the financial crisis in 2007. As a result, the banks’ appetite to increase market share is increasing.
In pursuit of more business, credit conditions have been loosening since the beginning of 2017 and throughout that time the market share objective has been the largest contributor to that move. As the economy moves ahead, that incentive to increase market share will not dissolve. Indeed, while Brexit uncertainty is affecting home buying behaviour, it is likely to strengthen.
Fix your mortgage rate now
For home buyers, though, the expectation of rising rates will feed into higher fixed rate mortgage costs and this is a reason to consider locking on a better rate now rather than waiting, particularly as buyers are in such a strong negotiating position. Weak and even negative house-price growth, combined with low mortgage rates, fixed in for a period, give buyers and sellers wanting to move on, opportunities to secure the home and mortgage that they want before interest rates start to rise.