UK interest rates were cut to 0.25 per cent following the EU referendum last year, which itself was the first time the base rate had moved since March 2009. So the recent move is a reversion to what was a fairly long-standing status quo before the Brexit vote.
However, while the upward move is a milestone, it probably tells us more about the recent past than the near future. When rates rise, a currency will typically strengthen — more investors will want to own that currency when the returns are higher.
The last UK rate hike in 2007 came a few days after the first iPhones went on sale. So this represents the first time many UK borrowers will have ever experienced an increase in their mortgage payments. The 0.25 per cent lift in the base rate will likely be passed on to borrowers on variable rate mortgage deals almost immediately — with a material effect.
Although the base rate is still just 0.5 per cent, this quarter point increase translates into an extra £250 a year in interest for every £100,000 of borrowing. Someone with a £500,000 mortgage will be paying more than £100 extra in interest every month. Only those on a fixed rate deal are likely to avoid some sort of increase.
The question is, does this rate rise signal the start of a series of future base rate increases? While it could be actioned over a long period of time, is the UK finally starting to move towards a normalisation of the base rate away from ultra-low levels? The Libor and swap rates, the money market rates which determine fixed-rate pricing, had risen in anticipation of the rate rise, and this may continue if further rises are anticipated.
As mortgage lenders adjust to this new landscape, home loan deals are likely be launched and withdrawn at a rapid pace. In a rising rate environment, we can expect the mortgage market to become more volatile for a while. Mortgage lenders, keen to meet their lending targets, will continue to play with rates to ensure they are in the best-buy tables, resulting in some jostling in the market.
When rates are being launched and withdrawn so quickly, borrowers will want to make sure they have access to the most up-to-date information to enhance their opportunity of getting the best deals. The argument for taking a fixed rate, is ever stronger. Borrowers who spot a good mortgage deal in the coming months should grab it.
Some mortgage holders will see their repayments affected by the change in rates, and mortgage rates on new home loans will rise, but in terms of the residential market, the move is unlikely to have an impact on overall pricing, although some rents may edge up if buy-to-let landlords affected by the change pass on their increased costs to tenants.
However, if there is another rate rise in the coming months, confirming the country’s move into a rate rise environment, this may have a wider effect on sentiment in the market. Also, the Bank of England is showing some younger homeowners that rates do actually rise, given how long it has been since the country saw an increase.
An increase in the base rate is often viewed with trepidation by the property industry but this long expected move is unlikely to have a negative impact. The Bank of England is expected to follow the same strategy as the US Fed, and gently apply the brakes while giving lots of advance warning, in order to balance the competing pressures of normalising rates while not derailing growth.
The writer is Associate Partner, International Project Marketing (MENA), at Knight Frank.
