Homebuyers have been given a few more months to lock into the record low mortgage rates that have helped keep the housing market booming during the pandemic, experts have said, after the Bank of England held the base rate at 0.1%.
Lenders had been repricing their home loans upwards in recent days amid speculation the rate would rise to 0.25%, and many of the cheapest deals have been withdrawn.
However, while there are no longer three- and five-year mortgages for sale at interest rates below 1%, borrowers with large deposits still have a large choice of loans priced at less than 2%.
Experts said while the cost of debt remained close to record lows, house prices were unlikely to fall. However activity and growth would slow as rises reduced borrowers’ disposable income.
“While the best deals may now already be history, the decision not to raise interest rates will give homebuyers further opportunity to lock into the low interest rates that have given a booming housing market oxygen during the past 16 months,” Lucian Cook, the head of residential research at the property firm Savills, said.
“With the stimulus of a stamp duty holiday behind us, any rise would be expected to contribute to a slowing in price growth and activity over the next 12 months.”
David Fell, a senior analyst at the property firm Hamptons, said the recent increases in the cost of mortgages would “remind buyers that rates don’t only move in a downward direction”.
However, he added: “For the average first-time buyer the current upwards pressure is likely to equate to tens rather than hundreds of pounds extra in monthly mortgage payments. I don’t think at this stage it will make much difference to most people’s buying decisions.”
Dominic Agace, the chief executive of the estate agency chain Winkworth, said speculation about rising interest rates had not affected the sentiment of would-be buyers.
“The market has naturally cooled since the end of the stamp duty but with such a low base for mortgage rates and proposed small increase in interest rates, this hasn’t altered the outlook of buyers,” he said.
Stamp duty holidays across the UK have fuelled a market that was already busy as people made lifestyle changes after the first lockdown of the pandemic.
As the final phase of the tax break came to an end in England at the end of September, sales slowed but the latest house price indices have shown price growth has continued.
On Wednesday, Nationwide said annual price inflation was running at 9.9%. Typically at this time of year the housing market grows quieter in the run-up to the winter months.
Anthony Codling, an analyst and chief executive of the property website Twindig, said he expected the market to be quiet for “at least a couple of months” and that some of next spring’s activity may have been pulled forward by the stamp duty incentive.
He said if lenders continued to compete for mortgage business and kept rates down, there could be enthusiasm from buyers after the winter. Although short-term mortgages may remain cheap, borrowers could be squeezed by the rising cost of living, which will feed into lenders’ affordability checks.
Any rise in a lender’s standard variable rate could also have an impact, as these are typically used to stress test new borrowers’ finances before mortgages are agreed.
Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk
Reducing what people are allowed to borrow will mean there is less money for them to spend on a property, which may not cause a problem for those with savings, but could reduce the number of buyers able to enter the market with low deposits.
Cook said: “Gradual rate rises are unlikely to put undue pressure on household finances but they are likely to limit the level of mortgage debt lenders will advance at the point of purchase, especially when a mandatory stress test on affordability is undertaken.”
Fell said if there was a big rise in interest rates that would make a difference to the housing market.
“Any significant rate rises over the next few years have to potential to reduce or even reverse price growth through squeezed affordability as well as buy-to-let investors re-discovering the opportunity for higher returns outside of property.”
