Property in: LONDON
Navigating Through Rising Mortgage Rates

Navigating Through Rising Mortgage Rates

by Ariana
4 minutes

The beginning of 2022's advantageous mortgage agreements is gradually fading into memory for many homeowners, confronted by the current tide of rising rates. However, the outlook suggests a gradual easing of this financial squeeze as we move through the year.

Economic Trends

Economic Trends and Real Estate

Last week's economic indicators stayed on course with expected trends, shedding light on the delicate balance influencing the real estate sector. A slight decrease in core inflation more than what was predicted, alongside a stubborn persistence in services inflation, was observed. The overall inflation figure came in slightly below expectations at 3.4%.

In response, the Bank of England’s decision to keep the bank rate steady at 5.25% on Thursday did not come as a surprise.

2023's Real Estate Recovery

The UK's property market, which has been on a path to recovery after a subdued 2023, arguably benefited from the lack of startling economic news. The mix of elevated mortgage rates and ongoing inflation resulted in a 20% drop in transactions last year, with a 5% fall in average property prices by September.

A surge of optimism emerged in the latter part of the year as inflation rates decreased rapidly, leading to predictions of several interest rate cuts in 2024.

Though initially expected to be five, these predictions have been adjusted to around three due to persistent core inflation.

Real estate recovery

This complex economic scenario has created a dynamic environment for negotiations between property buyers and sellers, particularly concerning pricing strategies.

Forecasting Mortgage Rate Impacts

So, what level of impact can we anticipate from the escalation of mortgage rates by the conclusion of 2025 as homeowners transition from their current lower-rate contracts?

A thorough examination of mortgage data sheds light on this question. This analysis takes into account the mix of new and refinancing mortgage deals, categorizing them by fixed terms and average rates, and forecasts potential rate fluctuations across various loan-to-value brackets.

Forecasting influence of mortgage rate

An immediate observation is the expiration of favourable two-year fixed-rate mortgages in the early part of this year, originating from the period when interest rates began their ascent in early 2022.

The series of 14 rate hikes from December 2021 to August 2023 escalated the average rate for a two-year, 75% loan-to-value mortgage from 1.57% to 6.18%.

Consequently, the percentage of all fixed-rate mortgages renewing at an initial rate of less than 2% is predicted to decrease from a peak of 45% in February to 26% by December. By late 2024, the renewal focus will shift primarily to five-year mortgages originating in 2019, with such low rates expected to phase out by mid-2027.

Despite the anticipated strain, a 3% uptick in UK property prices is projected for this year, supported by a steadier mortgage environment.

The Return to Fixed-Rate Preference

A notable trend is the return of two-year fixed mortgages as a favoured option, especially for borrowers looking to secure rates starting with '3' in the next couple of years. This marks a shift from the recent preference for variable rates due to anticipated peak bank rates.

Inclination to fixed rate

Some experts highlight the swing back to two-year fixed mortgages, underscoring the relatively small difference between these and five-year agreements.

The gradual adjustment from exceptionally low mortgage rates to higher ones is poised to cushion any abrupt impacts on property prices. The widespread adoption of fixed-rate mortgages in recent years introduces a slow and steady introduction of financial adjustments, offering a stark contrast to the volatile pre-pandemic period dominated by variable rates.

The enhanced financial resilience of lending institutions compared to the 2008/09 crisis is also expected to prevent a surge in foreclosures.

This transition towards higher-rate mortgages signifies a challenging yet manageable period ahead for many homeowners, indicative of a broader shift within the UK's real estate market that will unfold over the next few years.

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