Why interest rates are so important to the property market

Posted on 9th May 2024

Interest rates and mortgage rates are not the same thing

Often confused for one another, interest rates set by the Bank of England are not the same as the rates you’ll pay your mortgage provider. They do, though, play an important role.

When you’ll be affected

If you’re not on a fixed-rate mortgage, or are a first time buyer, higher interest rates will mean higher mortgage rates. This is because the lender (i.e. the bank) will need to recoup their costs and will pass them on to you.

When you won’t be affected

If you’re still on a fixed-rate deal for your mortgage, the rate will stay the same no matter if interest rates go up or down. This will only change when your deal (normally 2 or 5 years) comes to an end. More than a million people fall into this bracket for 2024 and are likely to see increases in their payments.

Other knock-on effects of high interest rates

Naturally, the more expensive it is to repay a mortgage, the more difficult it is going to be for people to afford to buy a property. This can cause a slowdown in the number of buyers actively looking and house prices can be affected. Although continuing to rise slowly, prices overall in the UK stagnated last month, rising only 0.1% on the previous month.

It’s not just sales it affects either. The lettings market has been massively impacted by high interest rates (and therefore high mortgage rates). Lots of landlords have sold up since Covid - having to repay much more on their buy-to-let mortgages being a key factor.

When will interest rates come down?

At the time of writing, 9th May 2024, the Bank of England has maintained the rate at 5.25%. A rate kept the same since August 2023. While it was expected there may be a drop this month, inflation remains at 3.2% - still above the government’s target of 2% - and it was this that was the driving factor behind the decision. However, almost all economic forecasts are predicting interest rates will come down steadily over the coming months (possibly August or September). Andrew Bailey, the governor of the Bank of England, has said he is optimistic that things are heading in the right direction and even referred to the housing market picking up as well.