What rising inflation and interest rates mean for new homebuyers

In January, the Bank of England raised interest rates again in an effort to control the economy. The measure came up against high inflation, up almost 5% in 2021.

Why are interest rates rising?

This is standard Bank of England practice, so it should come as no surprise. Even so, the scale of inflation and the corresponding rise in interest rates are unprecedented in recent years.

Higher interest rates can be a good thing for the public. Savers can get better returns from their savings accounts because ups and downs tend to be passed on to the big banks.

In fact, this is the exact reason why the Bank of England raises interest rates. Its intention is to encourage the big banks to also increase theirs.

By increasing the incentive for individuals and businesses to save, it is hoped that they are likely to spend less money. With a population less active in the market, higher prices will no longer be sustainable for sellers, which will curb rising inflation.

What does this mean for the housing market?

However, this public savings opportunity comes at the cost of more expensive borrowing. Interest rates apply to forms of credit, such as credit cards and all forms of bank loans. Higher interest rates on credit mean borrowers will pay more over the long term, as their initial loans accumulate at a faster rate over the life of their loan.

For many people, mortgages are the biggest form of credit they ever borrow. It is therefore not surprising that this zone feels a significant impact from the rise in interest rates.

For those with ‘trailer mortgages’, whose variable rates are linked to the Bank of England’s base rate, this is bad news. This means that a lower part of their borrowed principal will be compensated with each monthly payment, because a larger amount will disappear by paying the interest. On the other hand, borrowers with fixed rate mortgages will not suffer until their current term expires.

What does rising interest rates mean for new buyers?

House prices are still significantly higher than they were at the start of last year.

Mortgages and deposits will pose a greater challenge to future homeowners. In addition to the higher cost of living, new buyers will have a harder time reaching higher target sums with fewer paychecks to contribute.

On top of that, as-yet-unknown homebuyers have to deal with fees like land transfer fees. However, this large uncertainty can be resolved with online quote building services help.

With greater challenges in building up the initial sums needed to enter the market, those looking to buy their first property should feel the influence of inflation and interest rates rising the most.

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