A small cut … and some uncertainty
The Bank of England has announced a slight reduction in the base interest rate, a move that should impact the housing market. For homeowners, potential buyers, and investors alike, understanding the implications of this decision is crucial for making informed choices. Here we explore the potential effects of this rate cut on house prices, the timing of selling a property, and the broader economic context, particularly regarding inflation and future rate adjustments.
The Impact of a Base Rate Cut on House Prices
A reduction in the base rate typically makes borrowing cheaper, which we naturally predict will have a knock-on effect on mortgage rates. We had already seen mortgage rates drop in just the last couple of weeks, on the back of more certainty that a settled new government has brought, and competition amongst mortgage lenders. The first sub 4% rate for a very long time (admittedly for borrowers with large deposits only) was announced within the last fortnight.
For buyers, lower monthly repayments increases their purchasing power and potentially drives demand in the housing market. Higher demand logically tends to lead to increased house prices, especially in sought-after areas where properties are in short supply.
However, the relationship between interest rates and house prices isn’t always straightforward. While lower rates can stimulate demand, they also reflect broader economic conditions, such as slowing growth or inflation concerns. If the economy is perceived to be weakening, confidence may falter, and people might be less inclined to make significant financial commitments, like purchasing a home.
Right now, though, the broader economic outlook for GB’s performance is relatively positive (more so than was being suggested just a couple of months ago), so a base rate cut is a trigger to taking that momentum forward and cementing growth.
Timing for Vendors: To Sell or Not to Sell?
So the signs for an improvement to previously stalled market movement look slightly stronger. For those considering selling their property, today’s rate cut presents a good opportunity. We would expect lower interest rates to entice more buyers into the market, increasing competition and potentially leading to quicker sales and better offers.
There remains uncertainty surrounding inflation. It has neatly hit the core target of 2% in recent months, triggering the motivation to bring down the base rate. But…falls in energy pricing drop out of the inflation results in coming months, and services inflation and wage pressures both remain stubbornly high, at well over 5%. So one can see why the Bank’s Monetary Policy Committee were very evenly split, only coming down 5/4 in favour of yesterday’s small cut of 0.25%.
Market analysts do not expect to see interest rates drop sharply or quickly. Maybe one more small cut is reasonable to assume by the year end. So buyer confidence in the affordability of a house purchase will likely grow, but it won’t be a surge. Nevertheless, this appears to be the best time in recent months to come to market if you are looking to sell – buyer interest ought to be opening up, and lender action broadly focused on mortgage rate reductions.
Broad Industry Viewpoints on Inflation and Future Rate Cuts
The outlook on inflation and future base rate decisions is mixed. Some industry experts believe that today’s rate cut might be one of several adjustments aimed at supporting the economy. However, others caution that persistent inflation could even lead to rate falls stalling, potentially cooling the housing market.
It’s worth noting that while today’s cut might spur short-term activity, the long-term outlook remains uncertain. But the government appears committed to getting a housing strategy that works for the country as a whole, not least because a healthy housing market is a massive stimulant to generally improvement in economic activity. And their growth ambition needs such stimuli, at least within the bounds of sensibly controlled house price increases.
Where Should You Turn For Advice On Your Own Current Mortgage?
If you’re on a fixed-rate deal, your monthly payments won’t change until the end of your deal. And if you’re on a tracker mortgage, or a variable rate mortgage that follows Base Rate changes, this Base Rate cut will mean your monthly payments will also be cut.
If you’re coming to the end of a fixed-rate mortgage soon, you’ve probably already started to think about your upcoming rate.
If you’re thinking of moving home soon, a good way to find out how much you could borrow is to use our link to Mortgage Advice Bureau, market leaders in mortgage advice and committed to searching the whole market to find deals for you.
There’s also the Mortgage Charter to consider. In July 2023, this was launched to help those struggling to meet monthly payments, as well as borrowers coming to an end of their fixed rates soon.
The Mortgage Charter encourages lenders to be flexible and offer borrowers the chance to lock in a new deal up to six months before a current rate ends. Of course, borrowers can also consider moving to another lender by remortgaging, but this can take longer, as it requires going through a normal lending process with income checks, the legal process, and possibly a valuation of the home.
The process of re-mortgaging takes time; you’ll need to make sure you’re looking around a few months before the end of your current deal to avoid falling onto a Standard Variable Rate – which will cost more than the repayments you’d have made on a fixed rate mortgage. The current average for SVRs is a whopping 8.21%. This matters because lenders apply a “stress test” for affordability, and this is typically the lender’s SVR with at least another 1% on top.
Conclusion: Why Now Might Be A Good Time To Look To Sell
Given the current economic landscape, now could be a strategic time to put your property on the market. The base rate cut ought to boost buyer interest because of affordability, potentially leading to a favourable selling environment. However, it’s crucial to stay informed about economic trends and consider working with knowledgeable professionals who can provide insights tailored to your specific circumstances.
