What Economic Factors Contribute to a Change in Residential Mortgage Rates?

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What Economic Factors Contribute to a Change in Residential Mortgage Rates?

Residential mortgage rates have risen considerably towards the end of 2022 and into 2023. According to a recent report from the BBC, higher rates mean that some people have put off buying a home or renewing their mortgages. But does this leave a potential gap in the market for those ready to invest in property, and with their financial ducks already in a row? Here’s everything you need to know about the economic factors that can contribute to a change in residential mortgage rates, and how these may impact you: 

Why Have Mortgage Rates Risen?

It is factually accurate to assert that the cost of securing a new, fixed-rate mortgage has been steadily rising for the past twelve months. The primary reason for this was that market experts predicted that the Bank of England would increase its benchmark Bank Rate, and mortgage rates are conventionally linked to the Bank of England base rate. This prediction, and the rises it caused, was only further cemented when then-Prime Minister Liz Truss unveiled a mini-budget which caused financial institutions to lose faith in the government. As the mini-budget promised billions of pounds of tax cuts without explaining how they would be paid for, financial institutions panicked, withdrawing many mortgage products before re-releasing them at a much higher rate. It is only when this plan was reversed that mortgage rates began to fall again, but they are still significantly higher than they were this time twelve months ago.

What Other Economic Factors Can Influence Residential Mortgage Rates? 

As already outlined above, one of the primary indicators that there will be a change in residential mortgage rates is the Bank of England base rate: if this rises then mortgage rates will typically rise in line with it. You might also know this as the impact of inflation. Inflation is the rate of change in the consumer price of goods and services, and it is most commonly measured by using the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). The Bank of England takes inflation into consideration when it is establishing interest rates. When the inflation level within the UK is likely to go up in the near future, the Bank of England tends to increase the interest rates with the intention of subduing inflation, and when the opposite situation occurs interest rates will lower. Selecting a fixed-rate mortgage at the point that you secure it, rather than a tracker mortgage that will see your rate rise and fall in line with inflation is one way to minimise the impact of this economic factor on your mortgage rate. 

But other economic factors that can influence residential mortgage rates and that you need to be aware of include:

  • The Strength of the Economy. Whilst this may sound like a relatively generic factor, the stronger an economy is, the greater its demand for goods and services, including high-value goods such as property. You can monitor and assess how strong the economy is by looking at the GDP and employment (and unemployment) rates. Where there is high demand for property, you are more likely to find that mortgage rates will increase. This is because the more people within the market with significant buying power, the more money lenders have available. It is during these periods of economic strength that property prices also rise.

  • Geopolitical Factors. Whilst the biggest influence on residential mortgage rates in the UK is the domestic economy, the global economy is tied together more closely today than ever before. A key example of this is the current war in Ukraine. Whilst the UK is not directly involved in this invasion or conflict, it has been a significant contributing factor to the energy crisis and the cost-of-living crisis in the country. In the same way, geopolitical factors can cause interest rates to rise and fall in the UK, even if those events don’t seem to have any direct impact on or in the UK.

  • Special Circumstances. Finally, given the unprecedented few years that the UK has just experienced, it is worth mentioning that special circumstances outside of normal control can impact residential mortgage rates in the UK. The most obvious recent example of this is the COVID-19 pandemic. During the pandemic, the Bank of England acted to save jobs and support the economy by artificially supporting it, and therefore residential property prices actually rose by 13.5% in June 2021, after the majority of pandemic restrictions were lifted in the UK. These special circumstances cannot always be predicted, but by being prepared for the unexpected, financial and property investors can minimise the risk of their investments. 

What Happens Next?

The past twelve months have been a period of uncertainty for the residential mortgage market and those hoping to secure a mortgage, either to purchase their own property or to invest in property. Whilst fixed mortgage rates are now lowering, they are still much higher than investors might have expected or have budgeted for. These higher rates have come at a difficult time for many real estate investors, who are already seeing their finances stretched by rising energy and food bills. It has been predicted that as many as two million homeowners are currently facing fixed-rate mortgage deals that will expire this year, and face replacing this with either a new fixed-rate deal that costs more in repayments each month, or a tracker mortgage that guarantees not only a higher rate, at least in the short term, but also greater financial uncertainty. 

But forewarned is forearmed, and understanding the economic factors that can contribute to a change in residential mortgage rates will put you in a much stronger position to anticipate when these changes will come, and to mitigate the impact that the changing mortgage rates may have on you.