Lowered base rates could potentially impact the real estate market

Lowered base rates could potentially impact the real estate market

Interest Rate Cut Boosts UK Property Market and Eases Financial Pressure on Homeowners

In a move aimed at bolstering the sluggish UK economy, the Bank of England has reduced its main interest rate to 4%, the lowest since March 2023. The decision, made after signs that inflation had slowed and reached the Bank's target of 2%, is expected to lower borrowing costs for homeowners and stimulate the property market.

The interest rate cut has several key impacts. Mortgage affordability improves as monthly payments for new borrowers and those on variable or tracker mortgages are reduced. This can ease financial pressure on homeowners and potentially increase demand for homes.

Lower rates can also boost buyer confidence and purchasing power, potentially supporting or increasing housing prices as borrowing becomes cheaper. However, economic uncertainties, inflation concerns, and cautious consumer behavior could moderate the overall impact.

The rate cut aims to stimulate the economy, which is facing headwinds like rising unemployment and uncertainty over taxes. Despite rate cuts, households may remain cautious about spending due to concerns about future tax rises and economic growth prospects, possibly tempering immediate property market activity.

The Bank's governor has signaled a careful and gradual approach to further rate adjustments, adding uncertainty about future inflation and economic conditions. This cautious stance may result in a mixed market reaction, with some lenders and buyers hesitant to act until policy direction clarifies.

Financial experts have expressed divergent views on the cut. Some criticize it as premature and potentially undermining monetary policy credibility, warning it could worsen inflation challenges later. Others see it as necessary to support households facing high living costs and to stimulate economic growth.

Ben Nichols, interim managing director at RAW Capital Partners, expects an uptick in activity in the UK property market due to the interest rate reduction. House prices have grown for three consecutive months, while mortgage approvals have held steady near their highest level in 18 months, indicating that the market was stabilizing before the rate cut.

Rachelle Earwaker, senior economist at the Joesph Rowntree Foundation, states that the interest rate cut will allow struggling families with mortgages and unsecured loans some breathing space after years of additional financial pressure from high rates.

The Bank of England has updated its forecast for economic growth this year, from 0.5% to 1.5%. The Bank expects the economy to grow by 0.7% in the second quarter of this year, followed by 0.4% the quarter after that.

However, Q2 data from Pepper Advantage shows UK residential mortgages arrears down for the first time since the 2022 mini-Budget, but buy-to-let arrears are up 11% in Q2 compared to Q1. Lenders must recommit to offering a wide range of bespoke and flexible financial products to support the property market's continued recovery.

Sellers have flocked to put their properties on the market, and estate agents have noted an increase in buyer demand. The Bank of England's decision to reduce interest rates is hoped to encourage hesitant investors and buyers to resume their investment plans.

The Bank has not yet incorporated the impact of any measures introduced by Rachel Reeves into its forecasts. The average age of purchasing a first home has increased to mid 30s as young people can't afford mortgage repayments. According to recent data, two out of five people in the UK have struggled to pay their mortgage or rent due to inflated costs.

3.8m low-income households reported holding loans in May 2024 that were originally taken out to pay for essentials like food or housing, and they'll hopefully pay less in interest due to the rate cut. Paresh Raja, CEO of Market Financial Solutions, expects increased market activity in the coming weeks due to the interest rate reduction. Aaron Milburn, UK managing director at Pepper Advantage, expects the rate cut to help stimulate demand for new originations and provide relief to borrowers, especially those set to refinance.

1. The rate cut by the Bank of England, aiming to stimulate the economy, could lead to an increase in real-estate investing, as lowered interest rates make borrowing for housing more affordable.
2. The decision to reduce interest rates may potentially intensify demand for housing, as buyers experience improved purchasing power and increased confidence in the property market.
3. Financial experts such as Ben Nichols and Aaron Milburn anticipate a surge in activity in the UK property market, given the lowered rates and implications for mortgage affordability and buyer confidence.

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