How the Bank of England’s recent announcements will impact home movers

On the latest episode of The Home Stretch podcast, CEO of The Guild of Property Professionals, Iain McKenzie, spoke once again to property market analyst and CEO of Twindig, Anthony Codling, about his views on what we could expect to see in the market after the recent Bank of England interest rate announcement.

Codling who predicted the interest rate would be around 2% by the end of the year and possibly around the 2.5%-mark mid-Summer 2023, said that the Bank of England hasn’t increased the interest rate by 50 basis points in a single meeting for the last 27 years.

McKenzie says that given the current situation with the cost-of-living going up as it is, using interest rate hikes to curb inflation is a tricky tight rope to walk that could make things really challenging for many. “Yes, it is very tricky,” Codling agrees. “Pre-credit crunch, it was not uncommon to see interest rates around 7% or significantly higher, so rates today are half of what they were back then. However, we had been at 0.5% since 2009, seeing a huge drop in the bank rate during the credit crunch. Of course, during Covid, the bank rate went down to 0.1%, which was the lowest bank rate in history. Once there, the lever could only go one way, whereas when bank rates are at 3% or 4%, they can go either way and I think there is an element of the BoE wanting to give themselves a bit of wiggle room regarding controlling inflation which is a priority.”

Codling says that we will see most lenders increasing their floating rates by the 0.5%. Lenders’ bank rate trackers will be going up straight away, while their standard variable will probably go up in September. Overall, though, I think lenders will pass the increase onto the borrower. Around 80% of people have a fixed rate mortgage so they won’t see any changes immediately, however, when they come to re-mortgage, they will be paying a higher rate,” he comments.

So, the big question, says McKenzie, how will this impact the housing market?
“Essentially the thinking is it will take some heat out of the market as it will impact homebuyers’ affordability levels. A higher rate means a higher mortgage repayment, which a bank will take into consideration when accessing a buyer’s level of affordability. They are hoping this will slow down the growth in house prices because people will have less money they can borrow. Personally, I don’t think it will have a huge impact, because most people come up against what you call the flow limits, which is the principal that a lender doesn’t really lend more than four and a half times your income. This tends to hit more than the base line affordability in my view,” says Codling. “The bank will look at a potential buyer’s debt service ratio, where they check whether the mortgage payments are 40% or more of their gross wages. So, if a buyer earns £1,000 a month and their mortgage repayment is £400 or more, they will consider them the type of person who may fall into financial difficulty if the economy becomes stressed.”

Codling adds that while the interest rate may impact the size or expense of the house, he doesn’t believe it will have any real impact on the transaction figures. “As I have mentioned before, based on housing transaction data there is no correlation to the interest rate and transactions numbers. If people need to move, they move. They might buy a slightly smaller home, or one in a less expensive area, but the chances are they will still move. I think that we will still see around 1.1 million transactions this year and a similar figure next year despite the economic head winds,” Codling comments.

Looking at the data, do you still believe we will see the rate increases you have predicted, asks McKenzie. “The governor of the BoE now thinks that the bank rate will peak at around 3% in March 2023, which looking at the context of history is still very low. They are factoring into that forecast that they think we will be in a recession the whole way through next year,” Codling answers.

He continues, “the good news is that banks are relaxing their affordability testing, so ironically, while interest rates are going up, some people may find it easier to get a mortgage now than they did in July. The monthly mortgage approval rate has dipped below the long-term average, but we are still seeing over 63,000 mortgages getting approved a month. This is a key difference between this market and the one we saw in 2007, mortgage availability is high. This will keep transactions flowing and the market moving forward.”