Potential impact of major lenders repricing upwards
With some major lenders upping their mortgage rates in recent weeks, after a welcome respite of downward pricing, a leading UK estate agent has warned that increasing rates remain the biggest risk to the property market.
Nationwide and Virgin Money have become the latest lenders to have repriced higher in the weeks following Labour’s controversial autumn Budget, which saw Chancellor Rachel Reeves announce tax rises worth £40 billion to fund the NHS and other public services.
Estate agent and property services company Hamptons, while forecasting house prices will rise by 3.0% across Great Britain in 2025, has downgraded its forecast for longer-term property price growth, due to high interest rates and taxes bearing down on the market. It predicts a 3.5% rise in 2026 and 2.5% in 2027, according to Aneisha Beveridge (pictured), its head of research.
“Globally, inflation has been on a downward trajectory for most of the year and is now at a level where central banks are cutting rates,” Beveridge told Mortgage Introducer. “However, in the UK, markets are expecting smaller cuts than they were a year ago, primarily on the back of higher government borrowing.
“This has partially reversed some of this summer’s mortgage rate reductions which had been priced on faster cuts by the Bank of England. Mortgage rate increases, however they happen, remain the primary risk to the housing market. It’s mortgage rates that will remain the biggest driver of affordability and dictate how high monthly repayments are.”
Where will mortgage rates be in 12 months’ time?
Encouragingly, Hamptons is anticipating mortgage rates for those with a 10% or 15% deposit to end 2025 below where they are today. Its latest research suggests prospective buyer numbers are up by a fifth on the same time last year and by a quarter on 2019 levels.
“Downward pressure on mortgage rates over the second half of 2024 has translated into some new buyers starting their search, currently,” said Beveridge. “While short term there’s probably not a great deal of room for mortgage rates to fall much further, current rates are still attracting a cohort of buyers back to the market. These are people who sat the last two years out.”
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How should housing supply be approached?
As debate continues over how the UK addresses its housing crisis, with Reeves pledging £5bn towards Labour’s plan to build 1.5 million new homes, Beveridge believes it may be time for a rethink.
“Today, most new homes, both private and affordable, are built on the back of housebuilders or housing associations being able to secure private sales,” she noted. “So when interest rates rise, demand for housing falls, meaning fewer homes get built, even while need for housing continues to rise.”
Diversification away from a model which mostly relies on private sales fully subsidising affordable housing would in the long term iron out the impact of a slower sales market causing fewer affordable homes to be built, Beveridge explained.
With two base rate cuts in recent months and speculation about whether there will be a third when the Monetary Policy Committee meets in December, she suggests its members face a difficult balancing act.
“The Bank of England has to balance keeping inflation close to its 2% target with encouraging economic growth,” she observed. “With the benefit of hindsight, interest rates were probably too low for much of the last decade, making the move to higher rates particularly painful. The Bank now finds itself in a tricky position where inflation risk has moved to the upside, but most households find themselves materially worse off.”
In terms of the wider property market, around a third of homes bought this year will have been paid for in cash, on par with the 2012-2017 average, Beveridge said.
“Cash buyer numbers have returned back to levels close to their long-term average,” she shared. “This reflects a reversal from the bumper years of 2021 and 2022 when cash buyer levels dropped back to 26%-27% of the market and mortgaged buyers able to lock in record low mortgage rates drove sales.”
Beveridge believes that in a persistently uncertain market, brokers need to focus the minds of their clients on the future.
“While higher mortgage rates have been painful for a large minority, nationally there are around 1m fewer mortgaged households than in 2007 - these households, particularly those who’ve bought in the last few years, often need reminding to think long term,” she reasoned. “Once they’ve bought, over the medium term housing costs only ever tend to fall in real terms, even if there’s a few bumps along the way.”
