The Bank of England has decided to raise the interest rate for the second time in a decade up from 0.5% to 0.75%, the highest level since March 2009 when measures were taken to stave off the recession caused by the 2008 global financial crises. The has risen by 0.25% (a quarter of a percentage point) which will impact up to 3.5million with variable or tracker mortgages in the UK, with further rate rises to come according to Mark Carney, the Bank of England’s governor, but how will this affect the Leicester property market, namely, Leicester house prices?
In short, we may see an increase in rents paid by tenants of buy-to-let properties to cover the increased mortgage repayments and, contrary to this, house prices may fall as Leicester homebuyers revise their budgets to accommodate the increased mortgage repayments. Those who are cash buyers may welcome an interest rate rise but the Bank of England raising interest rates doesn’t necessarily reflect on the level of interest paid on savings accounts; for example, more than half of all UK banks refused to increase their savings interest rates from 0.25% when the Bank of England interest rate was previously doubled to 0.5%, Lloyds actually removed the interest earned on deposits in current accounts altogether when the Bank of England increased the interest rate last time.
To put it into perspective, the average property value in Leicester according to Zoopla is £323’369 (based on the price properties have been listed for sale at), which is an overall fall in value of 1.64% since 5th August 2017 whilst mortgage rates for buy to let properties in Leicester are charged at an average rate of between 4.49% and 5.99% (down from pre-2009 levels) but how does this affect you and other Leicester homeowners/property investors?
If you are on a fixed-rate mortgage, you won’t feel an immediate impact from a rate rise but the average UK standard variable rate mortgage is at 4.72%; this means if you are on a £100,000 variable mortgage, a rise in rates to 0.75% is likely to increase your annual cost by approximately £150 (around £12.50 extra a month), this modest increase won’t break the bank for most people living in Leicester, especially with the average single person in Leicester earning £23’199 and an average mortgage repayment of £780 per month; less than half an average single person’s salary.
However, when we factor in the impact of the rate rise on the wider economy, we can see how this might make people considering buying a home in Leicester feel the pinch. The interest rate rise affects us all, regardless of whether you own any financial products like a savings account or a mortgage. You see, businesses in Leicester are typically well-financed and an interest rate rise will impact their own debt repayments, especially those who own premises by the way of a mortgage. Their increased costs will be reflected in the products they sell, as the increased Buy-to-Let mortgage repayments will translate into increased rents, to cover the increased costs of business. This means that even everyday consumers will be impacted regardless of whether they have a mortgage or savings account or not.
Because everybody will be impacted by the rate rise, potential Leicester home buyers will be reluctant to pay full market values because they have to budget for other areas of their finances and personal spending and, as we have seen, lenders are already anticipating this by downvaluing properties leaving homeowners looking for sometimes thousands of pounds extra than they expected to pay out of their own pockets for the property they want; for property buyers who cannot raise the extra capital, these sales fall through meaning properties remain on the market for longer incurring council tax and maintenance costs making the sale less profitable for the vendor over time.
How exactly do interest rates affect property values?
Higher mortgage repayments discourage many prospective buyers and those looking to upgrade to a larger, more upmarket, higher-valued home, often making it comparatively cheaper to rent. However, it is also important to note that the average rent in Leicester is now higher than the average monthly mortgage repayment in Leicester so individuals need to weigh up whether it’s more financially beneficial to buy or rent a home in Leicester. Harry Albert Lettings & Estates, a Leicester letting agent, can help you make this decision by calling them on 0116 321 4970.
On top of this fall in demand for house purchases, the increased cost of mortgage repayments can push existing Leicester homeowners to sell, increasing the supply of properties on the market and a further decline in property values, as per the general rules of supply and demand; increased supply begets decreased demand. This vicious downward spiral of property values caused by the increased supply and decreased motivation to purchase and mortgage down-valuations can lead to economic problems, including recessions. In fact, the 2008 banking crisis started in the United States as a result of giving sub-prime mortgages to high-risk, poor creditworthy individuals which homeowners weren’t able to pay back so properties for sale flooded the market and there simply weren’t any buyers to pick them up, this lead to homes being repossessed. You can find out more about how the financial crises started by clicking here or by going to https://www.amazon.co.uk/Caused-Financial-Crisis-Jeffrey-Friedman/dp/0812221184/ref=as_li_ss_tl?ie=UTF8&linkCode=ll1&tag=plo31-21&linkId=c4e80c305dd3d35b957194140fe7daa9&language=en_GB.
- Affordable Property Management in Leicester: https://www.leicesterlettingagent.co.uk
- Find out more about selling your home at auction, you’ll be surprised: https://www.harryalbertgroup.co.uk/auctions
- The Future of Saving Money: https://www.leicesterpropertyinsight.co.uk/connectuk
- Get Exclusive Deals on Landlord Insurance: https://www.leicesterpropertyinsight.co.uk/landlord-insurance
- Free Weekend Landlord eClinic: https://www.leicesterpropertyinsight.co.uk/free-landlord-drop-eclinic-weekends