The Bank of England base rate hike, which was pushed higher from its historic low of 0.1%, has once again been delayed as the nation and many other parts of the world mourn the passing of Queen Elizabeth. The present rate of 1.75% gets extended for another week by this. Meanwhile, if you are looking to buy a property in Harrow, get in touch with the best Estate Agents in Harrow to make wise property decisions with the help of an expert.
The Monetary Policy Committee meeting in September 2022 has been postponed for a week due to the current state of national mourning in the United Kingdom. The new potential rate would be the highest since 2008, although rates have a history of swinging too far higher levels before the financial crisis 14 years ago, even though this would be the case now.
The Bank was generally anticipated to increase interest rates from their current level of 1.75% by at least 0.5 percentage points in reaction to inflation reaching its highest levels since the early 1980s. Since Gordon Brown, the then chancellor, gave the central bank independence to determine interest rates in 1997, it has seldom convened meetings outside a rigid timetable created at least a year in advance. Delays are infrequent; however, extra emergency meetings have been scheduled during economic crises like the 2008 financial crisis and the Covid pandemic.
Why does an increase in interest rates cause inflation to decline?
As Covid limits have been relaxed and consumer spending has increased, prices are rising significantly globally. Many businesses have trouble buying enough goods to sell due to an excess of consumers and too few available goods. The cost of gas and oil has skyrocketed since Russia invaded Ukraine. One method of preventing inflation or price increases is to raise interest rates. People are borrowing more often and saving more money due to the growing cost of borrowing.
Additionally, it encourages people to save more money. The Bank must strike a delicate balance, since it doesn’t want to restrain the economy unnecessarily. Since the 2008 global financial crisis, interest rates in the UK have been historically low. They represented barely 0.1% of the population the previous year.
What are the effects of rising interest rates on the housing market?
The interest rate has increased from a historic low of 0.1% to the current rate of 1.75% since last December, which is not expected to be the final increase.
The UK property market’s present position will be well known to first-time buyers or those intending to relocate in 2022. The most recent hike in interest rates can cause first-time homebuyers to reconsider obtaining a mortgage and wait to observe the longer-lasting consequences of the rate increase.
A traditional method of reducing inflation has been to raise interest rates. However, this might cause issues in particular industries. Lenders’ mortgage rates mimic general interest rates, making mortgages more costly for borrowers and decreasing demand from purchasers.
Rising mortgage rates would likely impact buy-to-let landlords, since their cash flow will be affected by larger mortgage repayments.
However, because their real income is unchanged, they will continue to be taxed at the same rate, requiring them to pay taxes out of their pockets. Many landlords are likely to elect to sell up under these conditions.
Can inflation benefit the real estate market?
While the situation may appear hopeless, there are still plenty of options. For starters, anyone preparing to sell their home would often benefit from an increase in housing prices.
The amount of the mortgage you will have to pay back might be minimal, given how significantly property values have increased. You would have a clean income of £650,000 to spend on your next property, for instance, if you took out an interest-only mortgage for £150,000 to buy a house that cost £200,000 but is now worth £800,000.
A landlord with a modest portfolio may, for instance, sell one home and use the proceeds to pay off the mortgages on the other properties, increasing their cash flow. Additionally, this will allow additional homes to enter the market, increasing supply and providing chances for purchasers.