Millions of UK homeowners would struggle with rate rise

While the UK property market continues to go from strength to strength, with 2014 expected to be another positive year for the sector, the Bank of England has issued a warning on a potential rise in base rates in the short to medium term. In a worst-case scenario, the Bank of England believes that 50% of UK mortgage holders would struggle to maintain payments, need to reduce their outgoings and possibly need to take on a second job. This would impact the £1.2 trillion of mortgage loans outstanding in the UK and change the landscape of the UK property market.

Even though this is a worst-case scenario, there is no doubt that a significant number of UK property owners would struggle to maintain their mortgage payments in light of an increase in base rates to around 3%. While an increase from the current rate of 0.5% up to 3% seems extremely unlikely in the short term it is a distinct possibility in the not too distant future.

Cost-cutting

The more likely outcome would be potential mortgage repayment problems for one third of the U.K.’s 11 million households who have outstanding mortgage arrangements. This financial model took into account an increase in pre-tax income of 5% per annum and an increase in base rates from 0.5% up to 3%. The more extreme situation works upon a freeze in wages in the short to medium term and an increase in base rates from 0.5% to 3%.

Quote from PropertyForum.com : “While it will come as no surprise to learn that Edinburgh is one of the most active and most popular property markets in Scotland, many people may be surprised to learn it is among the top 12 property hotspots in the world.”

There is no doubt that no matter how small any short to medium term increase in base rates, there will be a hiking of mortgage payments for many people in the UK. This is perhaps not a scenario many have considered in light of the buoyant UK property market but it is something which they will need to face at some point in the future. When you bear in mind that austerity measures are kicking in as we speak, many households are already reducing their expenditure, what else would be left to cut back on?

A warning shot for the UK property market

Only a few weeks ago the Bank of England was issuing a number of conditions under which we would expect to see UK base rates rise. These covered a reduction in inflation, which is happening, as well as a reduction in unemployment which is occurring quicker than many people had expected. It therefore seems as though the Bank of England is readying many in the UK for a potential short to medium term increase in base rates which would have an impact upon mortgage rates.

We can only hope that those looking to invest in the UK property market, often ignoring long-term value indicators, sit back and reconsider their position in light of the warning by the Bank of England. However, if we take into account human nature, the likelihood of a significant drop-off in UK property investment in the short to medium term seems unlikely as the fear and greed factors continue to dominate.