Interest rate rise will have negligible impact on housing affordability

Says Property Partner

New data analysis forecasts average mortgage interest rates would need to pass five per cent to reach the level of cost during financial crisis

An interest rate rise of 0.25 per cent by the Bank of England will have negligible impact on housing affordability according to new data analysis from Property Partner, the world’s first property stock exchange.

The analysis reveals the record-low affordability levels seen during the financial crisis occurred when mortgage payments accounted for over a fifth (23 per cent) of household income.

If mortgage providers pass on today’s 0.25 per cent interest rate rise direct to borrowers, mortgage payments will still only account for 12.8 per cent of household income, significantly below the levels seen up to and during the financial crisis.  

The average mortgage interest rate would have to rise above five per cent for the cost of mortgage repayments to return to the record levels seen during the financial crisis.

Today’s news of a 0.25 per cent interest rate is expected to see mortgage rates remain below two per cent, according to Property Partner’s forecast.

Mark Weedon, Head of Research at Property Partner said: “Borrowers have had it good for a decade, with mortgage affordability improving in spite of rising house prices.

“This isn’t about to change. There has been a lot of hype surrounding the first increase in interest rates for more than 10 years, but when it comes to housing affordability the impact of today’s rise will be negligible.

“Some homeowners will feel a slight pinch to the purse strings, but not at a level that should cause stress for many homeowners. Many remain on fixed rate deals set when the base rate was previously 0.5 per cent, so the average interest rate increase across homeowners is likely to be less than 0.25 per cent, even if the banks choose to pass the rise on in full.  

“The Bank of England has today again reiterated that interest rates will remain very low for the foreseeable future, rising slowly towards a new normal, well below the old normal where rates sat consistently at five per cent and above.”