Are you ready for a rise in UK base rates?

Despite the fact that George Osborne, the Chancellor of the Exchequer, has indicated that UK base rates will likely remain unchanged until 2015, there is growing concern about how even a small increase in base rates could impact UK households. A report out today suggested that there are in excess of 1 million people in the UK who could see their household incomes seriously stretched with just a relatively small increase in base rates. The largest element of average outgoings in the UK is attributed to mortgages especially in light of the ongoing buoyancy of the UK market.

While we have seen these scare stories before, should we be concerned about a potential increase in UK base rates and its impact on the UK property market?

Higher base rates are inevitable

Whether it happens in 2014, 2015 or beyond, there is no doubt that UK base rates will eventually return to their traditional range. The current base rate of 0.5% has been in place for a number of years now and is likely to remain unchanged for at least the next 12 months. However, the situation after 2014 is a little more complicated because as the UK economy continues to grow there will be a need to return base rates back to their normal range in due course.

Quote from PropertyForum.com : “In a move which will be music to the ears of investors in the UK property market, the U.K.’s largest mortgage lender Halifax has today issued a forecast for 2014.”

It’s also worth noting that a number of mortgage arrangements currently on offer are benefiting from the relatively low cost of borrowing for UK financial institutions. Even the smallest tick upwards in the cost of borrowing would impact mortgages and with many people already at the edge of their financial resources the potential consequences are of real concern.

Will this impact the UK property market?

There is no doubt that if UK household budgets are stretched, and mortgage rates tick higher, this will have an impact upon the UK property market. At this moment in time the sector is awash with cheap finance with the UK government also adding to this powerful movement. There is no doubt that many people have taken advantage of relatively cheap mortgage arrangements and this has led to an increase in the average cost of UK homes. While there is probably no need for concern at this moment in time, indeed the Bank of England and Halifax recently commented on the matter, at some point in 2014 we will need to look towards the next increase in UK base rates.

If the UK housing market continues to grow at its current rate, which the Halifax believes will happen in 2014, we could move towards a potentially overstretched position towards the end of the year. If this was to happen, and you also take into account potential increases in the cost of finance in 2015, then we could see a period of consolidation in the UK housing market towards the end of 2014. At this moment in time it is difficult to forecast what will happen because there are so many different factors to take into consideration although the sector is still going from strength to strength.

Conclusion

There is growing concern that in excess of 1 million households in the UK could see their financial resources stretched with even the smallest of increase in the cost of borrowing. Any increase in UK base rates, whether in 2014, 2015 or beyond, will immediately impact the mortgage market which is the largest monthly outgoing for many families in the UK. This could in theory put pressure on the UK housing market although at this moment in time nobody seems to looking any further than 2014.

Could we be in for a short sharp shock towards the end of 2014 or will we be looking towards a period of consolidation?