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Interest rate rise spells serious problems for housing market.

The last time interest rates were above 1% was back in 2009 and Gordon Brown was trying to shore up the economy following the financial crisis. While we are now living in very different fiscal times, interest rates have once again risen past 1% and it could spell the start of a difficult period for the economy and particularly for house prices.

People are already struggling due to the cost-of-living crisis and an increase in interest rates, and as a result mortgage rates, compounds the situation. Fortunately, the large majority of borrowers are on fixed rate deals so at least in the short term, they won’t see a change. However, when those deals come to an end a severe shock could be in store. Those on variable or tracker mortgages will already see their monthly payments increase.

After today’s rise to 1.25%, someone with a mortgage worth £250,000 over 25 years would pay a monthly payment of roughly £970. If interest rates climb to 2% monthly payments would soar to £1,059, a huge £89 difference. With energy and food prices climbing too, this could spell disastrous news for families up and down the country.

Further rate hikes are certainly not out of the question, and this could start to impact house prices. The housing market is already showing signs of a slowdown and how well it can weather further rate rises, alongside raging inflation, is yet to be seen but the prognosis is not good.

"However, at present there continues to be very little stock on the market, which will keep prices high. But, because there has been such a long period of ultra-low interest rates, many may suddenly struggle to meet their monthly payments. Lenders since the financial crash have had to do much more rigorous affordability stress tests on borrowers but the current fiscal climate could still derail some homeowners or at least make them think it might be better to downsize to lower monthly outgoings. This will bring more properties to market and the laws of supply and demand dictate that that could mean we see house prices at the very least stall if not cool down.

Once again, the biggest losers are first time buyers. They face a steep uphill battle to get on the housing ladder having to contend with rising interest rates, which make mortgages less affordable, inflation eating away at their deposits and the rest of the cost-of-living pressures. With wages failing to keep up with runaway house prices this is likely to be one of the most difficult times in the last few decades, if not longer, to be trying to get your foot on the housing ladder.

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