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Will UK Mortgage Rates Ruin the Property Market?

Last updated on in Finance

Will UK Mortgage Rates Ruin the Property Market?

UK mortgage rates have been on the rise for some time now, and it seems to be putting a dampener on the property market. Many people are waiting until rates go back down to invest in UK property, but is this really such a good idea?

Average property prices continue to hold strong

Property prices have been increasing steadily over the past few years, so they may continue to do so even with high mortgage rates. But, if interest rates keep rising then we could see a property price crash in the near future.

However, even with all the scaremongering in the property market, the average price of a UK property is up by 0.9% this month (October 2022). 

Buyer demand is still there, for now.

Tough decisions lay ahead for all types of buyers including the wealthy investor and the first timer. It's always difficult to judge the future especially when global markets around the world have taken a big hit this year. 

Buy now or wait for prices to drop?

If you're thinking of investing in a UK property, you need to weigh up the pros and cons carefully. 

On one hand, you could get a great deal on a property if prices start coming down and potentially crash. Although, that doesn't seem to be happening currently. On the other hand, unless you're able to part with 100% cash, you could be left with hefty monthly payments (very interest-heavy!) if rates continue to rise.

If you're looking to buy your first home and presuming you're not the "wealthy investor" (so you'll need a mortgage), then you'll need to think about even more carefully. It may be better to wait until interest rates go back down before taking that plunge into homeownership. 

That indeed has to happen otherwise it would mean there are much bigger problems in the country than an upwards trend in interest payments.

Banks are becoming stubborn and rejecting mortgage applications

Lenders are responding to rising interest rates by declining mortgages.  They're also becoming stricter with their borrowing criteria. Put simply, it's becoming more difficult to get a mortgage, especially if you're self-employed or have a less-than-perfect credit score.

So, what does this all mean for the future of the UK property market? 

Well, there's definitely a heightened sense of risk when it comes to buying as well as selling:

  • Buying, if you're needing one of the big loans on either a fixed or variable rate, is now a lot more expensive. For an investor, it's tricky for them to see the profits they'd usually expect.
  • Selling at a time when property prices are close to flatlining means many homeowners will likely be more reluctant to offload. That's only if they can afford to hold on to their property though. The shrewd investor will seek motivated sellers at a discounted price. Sellers in the current market most commonly want to "get rid" for affordability reasons – soaring interest rates.

The mortgage market is at a pivotal moment

For many property owners and investors, the rise in mortgage interest rates is a worrying trend. After all, higher mortgage payments mean that repayments can be tough for owners, while there's less money to be made for investors. And, if property prices do start to fall, then those with mortgages could find themselves in negative equity – where they owe more than the property is worth.

If rates stay high, we may see prices start to fall as people are priced out of the market. Whereas if rates return to normal, things could carry on as they are with a slight rise in prices. 

The Bank of England decides certainly has a critical role to play. Nonetheless, their ability to step in and return everything to normal is very limited when faced with all of the other international economic challenges and changes very much in full flight. 

Local UK banks are going to need all the confidence and reassurance from the UK government and the Bank of England before they consider ramping up approvals for mortgage requests again.

There's an opportunity for UK property investors to buy at a discount

The current UK property market presents a unique chance for experienced investors to land notable deals. If they know where to go to find those homeowners who are eager to negotiate a sale and cash out quickly, then they'll be starting to rub their hands together.

The perfect storm is brewing for cash-buyer investors. There remains a supply and demand issue with UK property: there are not enough houses now, and equally new houses are not being built fast enough.

It's anybody's guess if the window of opportunity is at its peak as the house price increases look to be on the verge of stalling. Nevertheless, if history continues to repeat itself, then a brick-and-mortar investment will always be a good one long term.

The cost of a UK property should gradually increase over time – this type of asset has always climbed in price even though there may be an odd dip here and there through various global crises and recessions.

Where to find the best UK property discounts in the current market

Although it might be more difficult to find a property deal in the current market, it's not impossible. Even if you're willing to wait, it's always worth keeping your eyes peeled because with a little more work, there's always a deal somewhere.

Some of the best places to find property bargains are via:

  • Online marketplace websites
  • Property auctions
  • Estate agents who specialise in quick or distressed sales
  • Property sourcing companies
  • Dedicated UK property communities such as Facebook groups

For more insights, we wrote a dedicated article about finding below market value UK property. It's not just about knowing where to look. It's key to know the right people to help or at least ensure you have some local knowledge of particular areas you're interested in.

If you're a cash-rich investor and have the stomach for a bit of extra risk, then there are some excellent opportunities in the existing climate. Just remember to tread carefully, do your research, and always leverage the support of experienced professionals such as local estate agents, sourcing experts, and other investors where ever possible.

The timeline for mortgage interest rates to return to normal

Mortgage interest rates are a hot topic right now in national news, with much of the population wondering when they will return to normal.

The answer to this question is unfortunately not clear, as it greatly depends on the actions of the Bank of England and how they plan to get the country back on track.

In the short term, expect rates to remain high as the country grapples with all that's going on with the political uncertainty in Europe, volatile oil prices, and a weak pound. The earliest we could see rates beginning to normalise could be the first quarter of 2024, but that's likely a best-case scenario.

Alternatives to buying UK property without a traditional mortgage

If you're not fortunate enough to have a boatload of cash to buy property without borrowing, you'll be happy to hear that there are a number of other ways to lend money:

  1. Secured loan – you borrow against the equity in other assets you might own (including another property). This can be useful if you have a good credit score and don't need to borrow a huge amount of money.
  2. Personal loan – this is handy if you don't have enough equity in other assets, but you have some form of income that's high enough to warrant this type of borrowing. Nevertheless, interest rates can be high and repayment periods short.
  3. Bridging loan – used to help "bridge the financial gap" that needs filling between when you want to buy a new property, yet need to wait for the funds from a sale of something else.
  4. Investor finance – although this could also be in the form of a loan from a private investor. Often, if it's an attractive property deal, an investor would want to be part of it by making available additional money to own a stake in the purchase. They'd expect a return on it later on through the likes of rental income or capital appreciation.

Stay in touch with the property and mortgage trends

The current state of the UK property market means that it's arguably a great time for investors to find cheap asking prices while they're not increasing at the speed they have done in recent years.

At any rate, all buyers should be cautious about high mortgage repayments and seek professional advice before investing. There are a number of alternatives to buying property without a traditional mortgage, so anyone interested in investing in UK property shouldn't be put off entirely by current rates – it's a time to get creative.

As with any type of major financial decision pertaining to a big investment, it's crucial to stay abreast of the latest property and mortgage market trends so you can make the best decisions for your individual circumstances.


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