- Rising mortgage rates pose a potential drag on the housing market
- Borrowers “stress tested” for higher rates, unlikely to lead to forced selling
- Long-term borrowing costs increase but have not yet dampened sentiment
The high street lender asserts that while typical homeowners exiting fixed-rate mortgages will face substantial increases in their monthly payments, borrowers have been “stress tested” for higher interest rates and should therefore be able to manage, so “waves of forced selling” are unlikely.
According to Nationwide, rising mortgage rates have yet to impact the housing market but could be a “significant drag” shortly.
Despite this, the high street lender stated that “a relatively soft landing is still possible” in light of income growth and modest property price declines.
The building society added that, even though typical homeowners exiting fixed-rate mortgages will experience significant increases in their monthly payments, these borrowers have been “stress tested” for higher interest rates and should therefore be able to manage.
The labour market and interest rates performed well, therefore “waves of forced selling” were improbable.
The judgment was made after fixed-rate mortgage deals recently surpassed the 6% threshold, following the Bank of England’s decision to increase the base rate from 4.5% to 5% to curb inflation, which remains stubbornly high at 8.7%.
Year-over-year, house prices fell 3.5% in June, following a 3.4% decline in May, according to Nationwide.
Prices were relatively stable during the month, increasing by 0.1%, rectifying May’s 0.1% month-over-month decline.
In June, the average UK dwelling price was £262,239.
Robert Gardner, the chief economist at Nationwide, stated, “Long-term borrowing costs have risen to levels comparable to those prevailing in the aftermath of last year’s mini-budget, but this has not yet had the same negative effect on sentiment.
For instance, the number of mortgage applications has not yet decreased. And consumer confidence indicators have continued to increase, although they remain below their long-term averages.
“Borrowing costs are rising sharply, which may slow home market activity.”
Nonetheless, he added, “A relatively soft landing is still conceivable, assuming the broader economy performs. As we (and the majority of other forecasters) anticipate”.
The unemployment rate is expected to stay below 5% and income growth to remain strong. With the Bank rate likely to peak in the coming quarters, lengthier-term interest rates should begin to decline.
If mortgage interest rates moderate, steady income growth and modest price declines could enhance affordability over time.
Mr. Gardner noted that a new two-year mortgage agreement could result in a monthly increase of £385 for a typical borrower who is leaving a fixed-rate mortgage after two years.
Those leaving five-year contracts face a monthly increase of approximately £315.
He stated, “Clearly, this is a significant increase, but those borrowers were evaluated at interest rates above the current market average to ensure they could handle such an increase.
In addition, incomes have increased at a robust rate in recent years. Lenders will also assist borrowers whenever feasible.
Thus, assuming the labour market and interest rates perform as expected. Forced sales will not spike to cause a more disorderly housing market change.
Chris Hodgkinson, managing director of the House Buyer Bureau, stated, “For those seeking to sell, current market conditions are a bit hit or miss”. In recent months, we’ve witnessed fluctuating levels of buyer demand. As buyer purchasing power declines, housing prices continue to fall, making many sellers unwilling to commit.
“More time on the market means lengthier transaction delays and a higher chance of a sale failing.”
