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Buying a House and Mortgage Rate Inflation

Published: 22 August 2023
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Author: Carl Shave - CEO and co-founder
Last updated: 10Apr2024

Should I buy a house in 2023?

“When is the best time to buy a house?” is a common question asked of our advisers.  The most relevant word here is “best”.  Defining when is best will very much depend on you and your individual circumstances. We all buy property for many different reasons, the main one being for personal use as our home, but it may be that you are buying as an investment or as a home for a dependent relative.  No one wants to feel they have paid more than they needed to for anything, but this is perhaps especially the case when it involves such large sums associated with property.  The two main factors to consider are:

House prices – So, do you buy now, or do you wait to see if house prices come down?  If ever a crystal ball was needed this is it, however without one how can you tell?  In short, you can’t.  Even those in the industry can never give a guarantee of what the market holds. What we do know is that whilst there is demand prices will hold steady, if not increase and this tends to be the ongoing environment we find ourselves in. It is rare that prices fall steadily and it is usually a sharp shock to the economy, such as the credit crunch, that results in prices falling quickly. These drops in property prices are relatively rare occurrences as historically, property tends to hold or rise in value.  Remember, if you are buying a home or something that is for the long term, the value can change for the better or worse throughout this time.

Interest rates – Do you look to take a mortgage when interest rates are at their current level and increasing further, or are you of the opinion that they will come down so you would be better to bide your time? Basing your property purchase decisions on the rate you may be able to obtain for your mortgage is a big risk. Of course, you want to be able to borrow money at the best rate possible but as a mortgage is a long-term loan for many, the likelihood of interest rates changing throughout is pretty high. Therefore, whilst you want to get the best scheme, do not simply base your affordability on today’s interest rates as you may be in for a shock should they rise in the future.  Take your mortgage out when it is right for you based on your circumstances and ensure you review this throughout its lifetime.

Why are mortgage rates increasing?

The Bank of England looks to control inflation by increasing or decreasing its Base Rate. This is the rate of interest that a central bank charges commercial banks for their loans. In turn, the banks increase the level of interest rates they charge their borrowers. They also increase the rates they give to their savers.

The Bank of England has a target of 2% for inflation. Inflation is calculated by figures obtained by the Office for National Statistics for a “basket” of around 700 goods.  The cost of these goods is compared to the same in the previous year and the difference is classed as the rate of inflation.  When inflation is higher than the target level of 2%, interest rates rise in an attempt to curb our spending. The less we spend the lower the price of goods become as companies and businesses look to entice us back to buying their goods or services.

How will higher interest rates affect me?

As interest rates rise so in turn does the cost of borrowing money. This does not solely apply to mortgages but, as this is for most people their largest monthly personal commitment, it is the one that most people take notice of. Whilst your mortgage will be individual to you, as a guide, a 1% increase in interest rates on a £200,000 mortgage over 25 years would result in an increase of around £100 per month to the payment. If you are currently on a variable rate mortgage, you will likely see an increase to your payment shortly after any rate rises, so you’ll be affected immediately.  If you are on a fixed rate mortgage, your payment will not change, however, all fixed rate schemes expire, so consider when this may be for you, as at this time any new scheme you may wish to arrange will very likely be at a higher interest rate.

We are here to answer any other questions you may have, get in touch.