What will happen to the London market when interest rates rise?

 Keatons are introducing regular blog posts written by senior experts from the Keatons team. Our first post is written by Nick Verdi (Sales expert) and Simon Jackson (Lettings expert).
 
Over 5 years have passed since the Bank of England cut the cost of borrowing to an all time low of 0.5%. With the economy growing and property prices rising the Bank of England Governor, Mark Carney, is always being faced with the question of when rates will increase.

 Question: What will happen to the London market when interest rates rise?

A. Nick Verdi, Office Manager at the Keatons Shoreditch branch:

Whilst there is endless speculation about when the rate will rise, it’s universally accepted that, at some point over the next few years, interest rates will definitely be heading north. So what effect will that have on the property market? Will the bubble burst? Or will prices just keep rising?

Well, firstly a sharp and significant rise is not in anyone’s interest so I expect to see a slow, gradual process probably by 0.25% increments over many months. Such small changes over a long period should not have a massive impact on financial health of homeowners. The new mortgage regulations (known as the mortgage market review or MMR) were introduced to try and ensure that increases were taken into account when assessing affordability. There will always be the odd individual that has stretched too far but every precaution will be taken to avoid homeowners facing repossession, and I do not see the market taking a huge tumble.

Although I would not expect to see any bursting bubbles in the property market, there will inevitably be a dip in confidence from homeowners which is likely to cause some ‘correction’ in the market. We may also see some buy to let investors liquidate some of their stock if financing becomes more expensive. As ever, mortgage lenders will save their best deals for homeowners with larger deposits and relatively low risk. Great news if you are one of them but not such good news for first time buyers who will be hit hardest by their monthly payments increasing, and the prospective buyers for whom the added interest could be one stretch too far.

For those people on variable rate mortgages, tracked at a certain value above the base rate or at the ‘standard variable rate’ set by your lender, now could be a great time to change to a long term fixed rate deal. Nationwide are currently offering a 2.59% fixed mortgage for 3 years.

A. Simon Jackson, Keatons Head of Lettings

I think the market will plateau but not crash, it’s not sustainable to continue growing at the rate we’ve seen in 2014 and the rate rise (when initiated) will bring some much needed stability back (thinking from a buyers perspective). I am concerned for those buyers who have been agreeing two year fixed term mortgages that have pushed their maximum price up and up, as the rise will hit these the hardest when they come to re mortgage.

Hopefully I am right and with just a marginal increase (0.25%-0.75%) this should calm the market and prices will settle where they are.