What will the Historically Low Interest Rates Mean for the UK's Property Market?

As of 19th March 2020, the Bank of England’s base rate has settled at 0.1%. This follows a drop from 0.25% the week before. By contrast, the rate prior to this was 0.75% - and had been since 2018. 

 

This massive decline has had a significant knock-on effect on interest rates across the country. So, what will be the impact on the UK’s property market? In this article, we explore just a few of the outcomes of an exceptionally low interest rate on the real estate industry.
 

Lower Mortgage Rates

 

The current interest rates, combined with unprecedented low mortgage deposit requirements, mean that the cost of borrowing when purchasing property is now much, much cheaper.

 

In mid-2021, Nationwide launched the first ever sub-1% mortgage deal. It’s a fixed-rate arrangement, and sits at just 0.99%.

 

It is worth noting that this particular offer is not available to first time buyers, but there are a range of other mortgage options available that require a deposit as low as 5%.

 

This deposit drop was introduced as a way of lubricating the property market to remedy the uncertainty and fear caused by the COVID-19 pandemic - and has fed into a massive property boom throughout 2020-2021.
 

Higher Property Prices

 

As more people are able to afford a mortgage, property valuations are pushed up. This is exacerbated by the significant demand that currently exists in the UK market, as furlough and home working have influenced a desire to achieve a more suitable living situation among many.

 

Supply, however, remains relatively low - adding to the perfect storm of skyrocketing prices.
 

Lending Cap Challenges

 

While mortgages have generally become more affordable, the 2014 mortgage lending cap - introduced in order to reduce debt following the 2008 financial crisis - remains in place.

 

This creates a relatively narrow field for those applying for a low-deposit mortgage and means that they can only borrow on this basis when purchasing a relatively low-value property.
 

Moving Forward with Low Interest Rates

 

Many experts believe that the current low interest rates - and the related low mortgage deposits and high property prices - are likely to stick around for a while. This is because interest has to remain low as long as the average UK wage fails to rise.

 

The Guardian suggests that lenders may eventually seek other ways to keep the market boom alive, including increasing mortgage terms. In Japan, this is already happening - with some lenders offering repayment over as many as 100 years.

 

However, this approach is likely to favour the rich, who may use it as a tax-evasion technique when planning their estate.

 

These significantly longer mortgage terms would make home owning more akin to “renting from the bank”, with full ownership becoming rarer and rarer.

 

Of course, a boom in property prices means that the market is more volatile - so there is still the risk of a sudden crash. 

 

These are unprecedented and unpredictable times, and the opinions of industry professionals are based purely on informed estimates as a result. Experts continue to closely monitor the market, watching out for new trends and indicators.

 

As of the present moment, the UK’s property boom shows no sign of abating - but that may change at any time.