A mortgage rate cut, improved consumer confidence, and resilience in the labour market have combined to lead to a rise in house prices during February.
According to Halifax’s latest report, average house prices rose 1.1% month-on-month following a 0.2% rise in January.
This is despite other gauges of the housing market showing a recent slide in prices from highs seen following the onset of the COVID-19 pandemic.
Read on to find out more about how mortgage rates, consumer confidence, and labour markets have contributed to this rise in house prices.
What are mortgage rates?
Mortgage rates are the interest rate set by mortgage lenders on their loans. It is a percentage of the loan amount that must be paid in addition to the mortgage principal. The higher the mortgage rate, the more expensive it is for borrowers to repay their mortgage loan.
When mortgage rates are low, it encourages potential homebuyers to enter the market as mortgage payments become more affordable. On the other hand, when mortgage rates are high, it can be a deterrent for prospective buyers as mortgage payments become more costly.
Mortgage rates also vary depending on factors such as the type of mortgage loan, borrowers’ credit scores, and changes in the economy.
Understanding mortgage rates is essential for anyone looking to purchase a home, as well as those who are considering refinancing an existing mortgage. By understanding mortgage rates, borrowers can make informed decisions and maximise their chances of finding the best mortgage loan.
In conclusion, mortgage rates are an important factor to consider when purchasing or refinancing a mortgage loan. By researching mortgage rates and understanding their implications, borrowers can make the best decision for their financial situation.
What has happened to UK mortgage rates in recent years?
At the start of 2020, mortgage rates had been steadily increasing for several years. The average two-year fixed mortgage rate stood at 2.63% in January 2020, while the average five-year mortgage rate was 3.46%.
Since then, mortgage rates have fallen significantly due to a combination of economic factors such as falling inflation and historically low base rates. In February 2021, the average two-year fixed mortgage rate had fallen to 1.54%, while the average five-year mortgage rate was 2.63%.
The mortgage rate landscape in the UK has continued to fluctuate since 2022. After the Bank of England raised interest rates in February, mortgage costs rose sharply as lenders pulled mortgage deals from the market and brought them back at higher prices.
However, due to a settling political landscape and a fall in annual inflation to 10.1% in January, mortgage rates have since declined. In March, there were 4,372 residential mortgage deals on the market – a significant increase from the 2,560 seen after last September’s mini-Budget; though still lower than the 5,300 mortgage deals available before the interest rate hike.
The outlook for mortgage rates remains uncertain, as the Bank of England has indicated that it may raise interest rates again in 2023. In the meantime, mortgage lenders are likely to continue offering competitive mortgage rates in order to attract new customers and meet their mortgage lending targets.
For prospective homebuyers or mortgage refinance candidates looking to secure a mortgage rate deal that suits their budget, now could be a good time to explore their mortgage options.
With mortgage rates still relatively low and competition for mortgage customers high, borrowers should take the opportunity to shop around and compare mortgage deals to find what works best for them.
In conclusion, it’s clear that mortgage rate changes over the last year have been far from consistent, and mortgage lenders are likely to remain in flux for the foreseeable future. It’s important that mortgage shoppers compare rates between different mortgage products and providers before taking out a mortgage or refinancing their existing mortgage. Doing so will ensure prospective borrowers secure the best mortgage rate and deal available to them.
Why have mortgage rates fallen?
1. Falling inflation
A significant driver of mortgage rate reductions is falling inflation.
As consumer prices have dropped, mortgage lenders have been able to reduce their mortgage rates without hurting their profits. This is because inflation affects mortgage lenders’ profits by reducing their mortgage interest payments.
2. Consumer confidence
A mortgage rate cut has also been accompanied by improved consumer confidence, which may have helped to stabilise house prices after the falls seen in November and December.
With more people feeling confident enough to buy a house, there has been an increased demand for homes which has helped push up prices.
3. Strong labour market
The relative resilience of the UK’s labour market has also been a contributing factor to house prices, allowing mortgage lenders to extend credit more readily and support mortgage approvals. UK unemployment is at the lowest rate since the 1970s.
What has happened to house prices in February 2023?
UK house prices picked up in February from the previous month as recent reductions in mortgage rates helped to stabilise the market.
The Halifax reports that average house price rose 1.1% to £285,476 last month compared with January. This is a sign of resilience amid hopes that the broader economic downturn will not be as severe as some speculators feared.
It followed a monthly gain in house prices of 0.2% in January and a fall of 1.3% in December.
The year-on-year growth has remained at 2.1% for a third straight month.
How does the house price rise differ between regions of the UK?
House prices have seen varying levels of increase around the UK. London has seen higher levels of growth than other parts of the country, with an annual rise of 2.7%. In comparison, Wales saw a 0.3% fall in house prices over the same period and Scotland recorded a small 0.5% rise in house prices on the year.
When looking at different property types, flats have seen the lowest levels of growth over the past 12 months with a 0.3% decrease in prices. Terraced properties have broadly stagnated (up just 0.3 per cent annually) and detached properties have increased by just 1.5 per cent on the year, the lowest rise since the early 1990s.
In conclusion, mortgage rate cuts have had an overall positive impact on house prices in the UK, with improved consumer confidence and a relatively resilient labour market enabling mortgage lenders to offer more credit and drive an increase in demand for houses. However, while overall house prices have risen there has been considerable variation by region and property type with London seeing higher levels of growth than other parts of the country.
What does the 2023 house price outlook mean for property investors?
Zoopla reports that current year-on-year house price growth is at 5.3%. However, many properties are available at a lower cost that originally advertised. The average discount to asking price in February was 2023 was £14,000 creating an opportunity for buying investors to secure properties while in the short term saving on their investment. This is a direct result of the increase in mortgage rates in previous months, requiring some homeowners to make a fast sale.
The housing market is adjusting to higher mortgage rates better than many people had expected. As the inflation rate has started to show signs of downward movement, mortgage rates are now in the 4-5% range.
Touchstone Education’s Paul Smith said, “4% mortgage rates are very manageable and consistent with very low levels of house price growth. This means that demand for properties from buyers remain high, with prices continuing to increase and benefitting investors.”
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