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    Interest Rates Increase to Above 5%

    Despite the forecast interest rates from the start of the year, they have been significantly rising since May. This month alone saw an increase of 0.5%, finally hitting the 5% mark. The 5% Base Rate is the highest it has been for 15 years and the 13th time it has increased since December 2021.

    July has begun with the average rate for a 5-year fixed deal surpassing the 5% Base Rate to 6.01%. Back in October 2021, the average rate for a 5-year fixed deal was 2.55%, and the new rate has not been as high as 6.01% since 21st November 2022. As for 2-year fixed rates, the average has surpassed 6% to 6.47%. Another shock for buyers.

    This is all the BOE’s efforts to bring inflation down to 2% from its current rate of 8.7%.

    But how does increasing interest rates reduce inflation?

    The BOE’s interest rate increase is possibly a different tactic to address the underlining issues driving inflation. Opting for an immediate larger Base Rate over spreading rate rises over a longer period makes it more expensive to borrow money. Doing this makes saving money more worthwhile than using it, helping people spend less and allowing time for price increases to slow and cool down.

    What Does an Interest Rate Increase Mean for the Property Market?

    While the interest rate increase would presumably put off potential buyers, the property market has not dwindled in activity. According to Right Move, more people are sending enquiries to estate agents than this time in 2019. People are looking at what they can afford, reassessing their budgets in reflection of the rising interest rates, rather than holding off their buying plans.

    Despite the growth in enquiries, the last two weeks have shown early signs of a decline in demand, lower than the levels in 2019. This is due to the better-than-expected start to the year, consequently deteriorating affordability dynamics for new home buyers alongside the interest rate increase. This, however, is expected during this time of year and is likely to increase back in summer.

    However, supply is beginning to grow. In the last 4 weeks, 18% more homes were listed for sale than the 5-year average. As the expansion of homes for sale will boost supply to meet the demand, it could risk house prices. The increase in choice will create further room for negotiation on price – great for buyers, but not so much for sellers.

    UK Interest Rate Forecast

    Despite the 2023 forecast, the Base Rate is expected to rise to 5.5% on 3rd August. However, interest rates are looking to remain in the 5-5.5% range and price falls of up to 5% are on track for this year.

    The firmer pricing from this spring reveals that 4-5% mortgage rates are manageable. However, the longer rates stay over 5% or close to 6%, like the current average fixed plans, the higher the hit to buying power will occur, resulting in lower prices and sales volumes.

    The highest interest rate increase yet represents a tipping point. Beyond this, house prices will fall along with sale volumes, hoping to decrease inflation.

    Advice for Buyers

    For those wanting to join the property ladder or continue the climb, adding to their portfolio, neither should be put off by the rising rates. Cash buying a property is one way to avoid rising mortgage rates. While investors may not have large amounts of cash upfront for the properties they initially planned for, perhaps looking to the world of short-term lets would be more beneficial. This way, landlords can rent out much smaller properties to generate greater profit and meet the growing demand as mortgage rates continue to increase.

    During uncertain times like these, using an investment agency over investing alone can make all the difference. Experts in the field have the market insight to advise and guide investors to the best opportunities that offer the best profits.

    Schedule a free call with the CityRise Investment Consultants here.

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