Britain’s first interest rate hike in more than a decade will have an almost immediate effect on mortgage rates, but with few implications for the prime housing market, experts say.
On Thursday, the Bank of England increased the official bank rate from 0.25% to 0.5% on Thursday in response to rising inflation. Those who will feel the biggest, most immediate effects are the millions of homeowners with variable-rate mortgages.
“The 0.25% lift in the base rate will likely be passed on to borrowers on variable-rate mortgage deals almost immediately—with a material effect,” said Simon Gammon, managing partner at Knight Frank Finance.
“This quarter point increase translates into an extra £250 a year in interest for every £100,000 of borrowing,” Mr. Gammon said.
By that measure, a homeowner with a £1 million (US$1.03 million) variable-rate mortgage would be paying an extra £208 (US$272) every month as a result of the rate hike. Mr. Gammon pointed out that interest rates are still historically low. The Guardian reported that the average standard variable-rate mortgage in the U.K. is now 4.6%.
The Bank of England’s decision to raise rates is a response to rising inflation. In September, consumer prices rose 3%, the highest level since March 2012 and above the central bank’s target rate of 2%.
The pound fell on the news of the rate hike by 1.3% against the U.S. dollar and closed at$1.3067 Thursday.
The interest rate hike is less relevant to the prime market, however, since luxury buyers tend to pay all cash. Savills found that only one in three buyers of homes over £2 million (US$2.6 million) across the country took out a mortgage. Those who did, tended to borrow only 50% or less of the cost of their home, the brokerage found in its 2015 study.
Higher interest rates may encourage entrants into London’s prime market to search for better deals in the suburbs, where prices are lower.
“It is likely to be a catalyst for buyers who might previously have bought in the well-established parts of London either to look to emerging prime markets or to those in commuter towns, as they seek to make the debt they are able to secure stretch further,” according to the Savills report.
But for the most part, the increased borrowing costs will be too modest to turn off high-net-worth buyers in prime central London the way they might dissuade the average first-time homebuyer, said Becky Fatemi, director of Rokstone’s London brokerage.
“The rate’s rise will be gradual and modest and, in my opinion, will not affect the prime central market, which is a market unto itself,” Ms. Fatemi said. “The real problems and grid-lock with the British property market will remain stamp duty and Brexit.”
She would still recommend to clients thinking about borrowing to lock into a fixed-rate mortgage given this is likely the first of several gradual increases to the base rate, she said.
Fixed-rate mortgages, while initially more expensive than variable mortgages, shield borrowers from changes to interest rates. In the U.K. fixed-rate mortgages are often limited to one to five years before converting to a standard variable-rate mortgage.
Shaun Church, director at mortgage broker Private Finance, recommended that homeowners with a fixed-rate mortgage look to extend terms of their loan.
“Those coming to the end of their mortgage deal may wish to consider a longer-term fix to lock into current rates,” Mr. Church said.
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