Are rising living costs connected to growing interest rates?

Following the recent interest rise by the Bank of England, we gather data and discuss how rising costs of living might be linked to the interest rate spikes and how mortgages are affected.

While the recovery from the pandemic seems to have gained solid momentum, the rising costs of living became a new major concern for many people in the UK. As for the real estate market, it is critical to understand how living costs impact interest rates, which, in turn, directly affect our mortgages.

Read on to find out how to prepare for the rising interest rates in the coming years. In addition, gain insights on the market settings for new first-time property buyers (FTB) looking to step onto the property ladder.

Rising interest rates and mortgages

Political uncertainty, rising inflation, and growing energy bills undoubtedly drive the prices of everything we buy up. That is why fears and concerns of homeowners about rising interest rates are only natural and understandable. However, they might be not completely justified.

The thing is, interest rates reached their historic lows over the past decade. It means that many homeowners and buyers did not even see higher rates. For example, older homeowners who saw interest rates of around 15% in the late 1980s will not be so worried about the 3% rise expected in the following years.

Second, record low levels meant that there was only one direction for the interest rates to go, which is up. And it would happen regardless of global and local political settings and trends. Last, lenders are carefully testing the rates before approving any mortgage, trying to ensure no property crises we saw in 2007/2008.

In other words, growing concerns about rising interest rates are understandable as they will sit along with the overall increased costs of living. We will see many households readjusting their spending and reevaluating the impact of higher mortgage payments.

It is critical to mention that concerns about higher interest rates also depend on different mortgage types.

Fixed- and variable-rate mortgages: what is the difference?

There are almost no reasons to worry about the rising interest rates for those with fixed-rate products. This type of mortgage does not follow the base rate, so the mortgage repayments stay fixed. The rates will affect fixed-rate mortgages when you need to remortgage or find a new product.

In turn, those with variable-rate mortgages depend on the interest rate. But brokers stress-test any scenarios regarding the rising rates and how they affect the ability of borrowers to repay.

Note that borrowers with variable rate products took advantage of the record-low interest rates and know the advantages and disadvantages of this type of mortgage. Additionally, they are free of early repayment fees. It means they can get out of the mortgage earlier.

First-time property buyers and rising interest rates

Buyers looking to remortgage or get a new mortgage will most likely have less to borrow than they could before the rising rates.

And it is the same for the first-time property buyers (FTBs) looking to step onto the property ladder.

Lenders are likewise uncertain about the affordability calculations for new borrowers. Do lenders need to increase the income multiples, and should they conduct more strict stress testing?

However, there are several positive trends in the FTBs property market. The recent data shows that 70% of new buyers rely solely on their own funds, while a further 30% get help from parents. Moreover, the number of buyers with gift or loaned mortgages dropped from 39% to 23% despite the rising property prices.

How should homeowners act?

Homeowners cannot control the rising interest rates, so they should try to avoid worries about them. The rates will rise in 2022 and beyond but will not reach the historical growth levels of the late 1980s.

A decent move in the face of challenging settings will be reevaluating the outgoings, particularly given the rising costs of living. In addition, homeowners should not worry but act and talk about their mortgage concerns with a broker or a financial advisor. Support and help are there for those who need it.