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UK Bank Raises Interest Rates

Experts and industry players are clear that the increase in interest rates will not have too adverse an effect on the property market. In fact, the UK’s property market will take the rise in its stride, according to ratings agency Moody’s.

The official bank rate in the UK has been lifted from 0.25% to 0.5%, the first increase since July 2007. The move reverses the cut in August of last year, which was made in the wake of the vote to leave the European Union.

Even with the increase, interest rates still remain at historic lows. To lend some perspective, Malaysia’s interest rates are at a high 3%, while the interest rates for Australia and Singapore are at 1.5% and 1.1%, respectively.

Higher interest rates increase the cost of borrowing money, which moderates economic growth and brings inflation under control.The panel which sets interest rates, called the Monetary Policy Committee (MPC), has justified the rate increase by pointing to record-low unemployment, rising inflation and stronger global economic growth.


In contract, Malaysia's interest rates are at a far higher 3% compared to UK's 0.5%. Image credit: Trading Economics
In contract, Malaysia’s interest rates are at a far higher 3% compared to UK’s 0.5%. Image credit: Trading Economics

Bank of England governor Mark Carney stated that the UK economy is expected to grow at about 1.7% for the next few years. He said this would require “about two more interest rate increases over the next three years”, taking the official rate to 1%.

The Bank of England (BOE) has been reluctant to raise interest rates until now, arguing that inflation had been boosted by the fall in the value of the pound since the Brexit vote in June of last year. OBR predicts inflation will peak at 3% this quarter before falling back towards its 2% target over the next year.

Expectedly, the increase in interest rates will cause knock-on effects in the UK property market. Homeowners on variable rate mortgages, whether it is a standard variable rate or a tracker rate, will be most affected. However, homeowners whose mortgages are on a fixed rate will not be affected by the rate hike until  they remortgage their property.

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Higher mortgage payments caused by rising rates can put less households in reach of a mortgage (loan). The lower competition can reduce demand for property which will in turn slow down property price growth. Correspondingly, the market for rental properties will increase as people who might have bought a house can now only afford to rent. This, from the investor perspective, is a good thing.

Experts and industry players are clear that the increase in interest rates will not have too adverse an effect on the property market. In fact, the UK’s property market will take the rise in its stride, according to ratings agency Moody’s.

Moody’s economist Colin Ellis said, “We have expected a rate rise for some time. This is about taking away emergency stimulus introduced after the referendum vote. A rise of 25 basis points [0.25%] is not going to move the dial. A rise of 0.25% pales into insignificance compared to the 8%-10% decline in the currency.”

Surveys from major mortgage lenders Halifax and Nationwide have painted a buoyant picture of the housing market. Halifax reported that house prices in the UK were rising at their fastest annual pace since February, up 4.5% to a record £225,826. Nationwide’s house price index also showed prices picking up in October, to an annual rate of 2.5%, the highest reading recorded in three months.

Savills predicts the housing market will grow by 14% from 2018 to 2022 based on an assumed Bank base rate of 2.25% by 2022. The north-west of England is set to experience the fastest price growth in the UK over the next five years: a surge of 18.1%.

Savills also forecast that rents are set to grow faster than house prices in London for the first time since 2011. They are forecast to rise 17% over the next five years, despite a 3% fall this year.

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Virata Thaivasigamony of property consultancy CSI Prope commented, “The interest rates are now still very low, so it’s a good time to get into property. The fact that the UK is increasing interest rates at this time is a great statement of confidence in its economy, that Brexit is no longer a cause for concern.

“The UK has had a housing crisis over the past few years, and the increase in interest rates isn’t going to change the basic fact that people still need homes — which are a basic necessity. If people can’t afford to mortgage, they will have to rent. You’ll see rental income potentially going up, as demand for housing continues its upward trend.”

Interest rates remaining near historic lows bodes well for buyers, and today’s market still reflects some of the cheapest debt a property buyer will be able to attain in the market.

Article by Ian Choong

CSI Prop proudly promotes international investment property with high yields at low risk. Our portfolio comprises residential property in cities across the United Kingdom (London, Luton, Manchester, Liverpool, Newcastle, York, Glasgow, Scotland; Sheffield, etc); Australia (Melbourne, Perth, Brisbane) and Thailand (Bangkok). Our projects are concentrated in high-growth areas with great educational, infrastructural and job growth potentials. We aspire to make a difference in the lives of our clients by helping them achieve their investment goals through strong market research backed by third party experts. 

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