With inflation up, demand for an interest rate hike has increased. But what does this mean for the housing market and mortgages?
When will interest rates rise? For thousands of homeowners and would-be first-time buyers in the UK, that’s the big question right now.
How soon will rates go up – and by how much – and will it have a huge impact on the finances of millions of current and future mortgage borrowers? It is likely also to dictate how well Britain’s housing market bounces back from its current stagnation.
So what factors will dictate whether rates go up soon?
Economic uncertainty
The January inflation figures, released in mid-February, show that the Consumer Prices Index (CPI) had risen to 4 per cent a year, up from 3.7 per cent in December, and the highest level since 2008.
This is double the Bank of England’s 2 per cent target: if inflation isn’t kept on a tight rein, it can lead to rises in wages, which push prices up even further – and the whole thing risks spiralling out of control.
But so far the Bank’s Monetary Policy Committee, which sets the base interest rate every month, has refused to put up rates to help bring down inflation.
This is because Britain’s economic recovery is still in quite a fragile state. Any rise in interest rates would raise mortgage and other borrowing costs, which could lead to a reduction in consumer spending. That would risk the UK slipping back into recession.
If the next set of economic statistics show better growth, the MPC would be much more likely to raise rates sooner.
Bank of England governor Mervyn King says rates will rise at some point, but refuses to speculate when. Many economists think the first rise will be this spring. But further evidence that the UK economy is still struggling could delay this.
Mortgage rates starting to rise
Britain’s banks, however, have started to take the view that rates will rise sooner rather than later. This means many of them have started to increase the costs of their loans, especially on fixed-rate mortgage deals.
If the base rate rises faster than expected, these mortgages will become even more expensive, so anyone who is due to remortgage soon may benefit from acting now.
Outlook for the property market
After a slow start to 2011, some surveys have indicated a bit more action in the housing market.
There is speculation this could be due to fears of an imminent rate rise, with more people deciding to move house and lock in a mortgage rate before costs increase.
Figures from website FindaProperty.com suggest prices rose 0.3 per cent in January, bucking a trend of three successive monthly falls.
Nigel Lewis at FindaProperty.com said: “The property market has picked up over the last month, but with prices still 0.4 per cent less than this time last year, our current feeling is one of cautious optimism.
“Property prices often increase slightly after the seasonal Christmas slowdown, but it’s likely that this price inflation also has been boosted by pent-up demand caused by the awful weather at the end of last year.
“There’s also been a lot of talk over the past month about the possibility of a rise in the interest rate and many mortgage providers are already withdrawing some of their cheaper deals, so it may be that the market has picked up over the past month in anticipation of this.”
But what happens to house prices is dependent on many other factors. If banks make mortgages easier to come by for first-time buyers, this is likely to provide a big boost.
And a growing economy could boost confidence and persuade more buyers and sellers to come to market.
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