Interest rates impact on housing market

What is inflation?

Inflation refers to prices rising. The rate of inflation is the speed at which the prices rise. So, if you're in the housing market, inflation will refer to the rising price of houses and how quickly they're rising.

The Office for National Statistics (ONS) calculates the rate of inflation monthly, and there are three types of inflation. These are:

• consumer price inflation
• producer price inflation
• House Price Index

How does inflation affect interest rates?

When inflation goes up, which it currently is in the UK, particularly with rising energy prices, interest rates often go up in a bid to try to lower inflation. However, this can result in expensive borrowing.

How do interest rates affect the housing market?

Interest rates affect the housing market in many ways. For example, interest rates affect house prices and mortgage rates. You're likely to need to borrow money to help you buy a home, often in the form of a mortgage, and this has a rate of interest attached to it.

What does inflation do to house prices?

If inflation is high this can affect housing prices. According to the ONS, housing prices are on the rise which affects the rise in inflation. In turn though, if inflation is high, house prices may come down as this increases the prospect of a house being bought.

Inflation, interest rates and mortgage rates: How are they linked?

You can probably now see the link between inflation, interest rates and mortgage rates. If inflation rises, interest rates often go up to counteract it. As mortgages are a type of loan, they have a rate of interest attached to them when you borrow. 

So if you're in the housing market and need to take out a mortgage, your interest rate on that mortgage is likely to be high as inflation is high too. This means you will have a high mortgage rate.

Fixed-rate vs variable rate mortgages

There are different types of mortgages such as;

• residential mortgages
• buy-to-let mortgages
• let-to-buy mortgages 
• holiday let mortgages

There are also different types of mortgage rates:

1. Fixed-rate mortgage

A fixed-rate mortgage is not affected by interest rates. This is because it has a  fixed rate of interest which remains the same throughout an agreed period. When this period ends, the fixed rate of the internet will also end.

2. Variable rate mortgage

A variable-rate mortgage, however, does not have a fixed rate of interest. Instead, the interest rate varies so can change at any time. Changes are usually linked to the state of the UK economy,It is also useful to note that when buying a second home, a second home mortgage tends to have a higher mortgage rate than a mortgage for a first home.

Is it a good time to buy a house?

Whilst house prices have come down, this does not necessarily mean now is a good time to buy a house. This is because buying a house is affected by interest rates and inflation. When you buy a house you will likely need to get a mortgage and current average mortgage rates are high. This can have a massive impact on buying a house, particularly where inflation is high and the costs of living are rising.

Deciding whether or not now is a good time for buying a house can depend on whether you are buying your first house or a second home. Buying a second home is of interest to many people. You may decide that it is a good time to buy a house as a second home because:

• you desire a second home elsewhere
• an extra stream of income would come in handy
• a family member needs help to get on the property ladder

If you're thinking of buying a second home, you may need a second home mortgage. Therefore, when thinking about if it is a good time to buy a house, you will need to think about your personal circumstances in terms of the spare funds you have to make up a deposit for the house. 

If you are buying a second home your finances may be stretched, meaning a large deposit may be harder to find. Also as a second home is often viewed as an investment property, you will often require a larger deposit than if it were your first home.

Is now the best time to sell a house?

Good question. Well, if you take into account that it may be difficult to buy a house at the current time due to the rise in the cost of living and because mortgage interest rates are high, house buyers may have lower budgets. This in turn will affect the price at which you put your house on the market and affect your decision as to whether now is a good time for you to sell your house. 

Winter is also renowned for not being a great time to buy a house, This is because most people's buying is geared towards the festive season so less money is available to invest in the property market.

Thinking of buying, selling or remortgaging?

If you are thinking of buying, selling or remortgaging your house, you should take into account how interest rates are currently impacting the housing market. Buying a second home, for example, is an important purchase and a mortgage for a second home can be affected greatly by interest rates and inflation. 

At Homeward Legal, our solicitors have a thorough understanding of how interest rates can impact you, whatever your conveyancing needs, so you are in safe hands with us. We can advise you accordingly and help you with a successful buy, sell or remortgage.  

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