The Bank of England has increased the Bank Rate to 4.5%, its highest level in nearly 15 years. In this Q&A, I’ll answer your questions about the Bank Rate rise and its impact on the housing market.

Why has the Bank Rate risen again?

The Bank Rate influences all the other interest rates in the UK, including those you have for a mortgage, loan or savings account.

Inflation is currently at 10.1% and the Bank of England needs to try to meet an inflation target of 2% set by the government.

They will increase the Bank Rate when they want to dampen demand, encouraging people to save money rather than spend. In turn, this should slow the price inflation of goods and services.

Will the Bank Rate rise affect my mortgage rate?

The Bank Rate has risen 12 times in a row since December 2021. This initially caused mortgage rates to rise quickly to reach over 6% at the end of 2022, but they have since fallen back to the 4-5% range with little change in recent weeks.

Mortgage lenders have been pricing their products in anticipation of further Bank Rate rises, which means many have already factored it into the cost of borrowing for new home buyers.

Plus with the cost-of-living rises and fewer homebuyers in the market than last year, mortgage lenders need to keep their rates competitive to attract new business.

We expect mortgage rates to remain within the 4-5% range over the coming months and for the rest of the year.

If you already have a mortgage, it depends on what type of mortgage you have as to whether you will be affected by the Bank Rate rise.

Many homeowners with mortgages are on fixed rates and so will feel no immediate impact from a change in the Bank Rate.

However, most households with mortgages will face paying more when they remortgage onto a higher mortgage rate. If you’re worried about having problems paying back your mortgage when this happens, discuss the interest rate rises with your bank or mortgage broker.

Will the Bank Rate rise cause house prices to drop further?

Our predictions for house prices haven’t changed with today’s Bank Rate rise.

We think UK house prices will be 1% lower on average than today by the end of 2023. With mortgage rates set to remain higher than in the past, house price growth is going to be much lower than in recent years, with prices rising more slowly than earnings.

If the outlook for the economy deteriorated rapidly and unemployment increased, there would be greater likelihood of larger house price falls.

Many households are wondering if they should wait before making any housing moves.

If you’re considering moving house or buying your first home, it’s hard to see a strong case for waiting. Mortgage rates have settled at between 4-5% and we expect them to remain this way for the rest of the year.

Buying a home is a 4 to 9 month process. As long as it’s the right home for you, you’ve considered all your options, you don’t plan to move again soon and your job prospects look good, there is not a strong case to delay.

Predicting house prices and timing of when to make a move is a challenge. Most homeowners only move once every 20 years – or 5 to 12 years if you’re moving on from your first home.

We expect house price growth to return to very low positive growth over the next few years so falls of 1% this year are unlikely to leave you in negative equity over the time you’re in your home.

It’s really important you don’t make your home buying decision expecting prices to rise quickly like in the past.

House price growth will be much lower than in the past but, as you pay down your mortgage, you end up with your own home and no monthly repayments as you enter retirement.

What are the chances of seeing rapid house price growth again in the near future?

The rate of house price inflation is going to be much lower in future than what the UK has experienced over recent decades.

In the 30 years to 2007 house prices increased by an average 9% a year. In the last decade growth has been less than half this rate at 4%.

Over the long run house prices tend to track growth in household incomes or earnings which have averaged 3-4% a year.

House prices are going through an adjustment phase as a higher cost of living and rising  mortgage rates reduce buying power.

We do not think there will be double digit price falls but prices look set to remain broadly flat for some time at the national level.

How much less should I expect to sell my house for now than I would have a year ago?

If you’re selling your home, you’re very unlikely to get the price you would have got a year ago.

At the start of 2022 most sellers got 100% of the asking price. Today, buyers are negotiating harder and the average seller is having to accept 4-6% below the asking price.

Many sellers have adjusted asking prices slightly lower in the last six months to reflect the reduction in buying power resulting from higher mortgage rates.

The positive is that the average homeowner made £45,000 in capital gains over the pandemic. So while you may now have to accept a £14,000 discount if you sell, you are still up and can move onto your next home – where you will also be able to get a discount.

There is a big variation in house price growth at a localised level. Prices in Oldham and Wolverhampton are up by 5% in the last year whereas prices are falling in parts of London.

Ultimately it will depend on the house you are looking to sell or buy and how attractive it is to who is in the market at the current time.

There are fewer buyers in the market than this time last year but sales are still being agreed.

People want to move for a whole range of reasons such as retirement, working from home, relocating and looking to reduce running costs.

Speaking to a local estate agent is the best way to get a view on the likely selling prices of your home and who is in the market to buy.

Will the cost of buying a house increase more in or outside of London in the coming year?

It is likely that the cost of buying a house outside of London will increase at a faster rate than in London in the coming year.

This is because market activity is holding up best in more affordable housing markets across the North of England and Scotland. There are more sales agreed and stronger demand from buyers in these areas, which gives rise to stronger house price growth.

However, national house price growth has slowed to 3% so prices of homes outside London and the South East aren’t going to race away.

They are likely to register very low house price growth in the coming year, rather than the modest price falls of up to 5% that are likely in London and the South East.

Key takeaways

  • The Bank of England has today increased the Bank Rate to 4.5% – this 12th consecutive rise brings it to the highest level in nearly 15 years
  • The 0.25 percentage point increase is part of the Bank of England’s ongoing efforts to curb rising inflation in the UK
  • Many mortgage lenders have already factored this expected Bank Rate rise into the cost of borrowing for new home buyers
  • With mortgage rates set to remain at 4-5% this year, house price growth is going to be much lower than in recent years
  • Here’s my take on the Bank Rate rise, how it will impact the housing market and what to consider with your next property decision.