Bank of England: How lowering interest rates affects property
The Bank of England have at last slashed interest rates to 5% for the first time in over four years.
The sun finally coming out in England was thought to be the greatest news of this week but the latest announcement from the Bank of England has certainly given it a run for its money. This afternoon members of the Monetary Policy Committee (MPC) remarked interest rates would be coming down to 5% from 5.25%.
The MPC claimed they were encouraged to make the decision after they saw signs inflation was slowing and it hit their target of 2%. Governor Andrew Bailey said that ‘inflationary pressures have eased enough that we’ve been able to cut interest rates today’.
However, he added: ‘We need to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much. Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country.’
As well as announcing the reduction, the Bank have likewise updated their forecast for economic growth this year, from 0.5% to 1.5%. Officials have explained they expect the economy to grow by 0.7% in the second quarter of this year, followed by 0.4% the quarter after that.
Although, the Bank have also stated they are yet to incorporate the impact of any measures introduced by Rachel Reeves into its forecasts. The nine MPC members were briefed on the new chancellor’s latest fiscal announcement earlier this week.
News of the cut has come as a massive shock as the Bank haven’t implemented a reduction since the onset of the Covid-19 pandemic in 2020. It is hoped the reduction will ease pressures on homeowners as they have faced sky-high mortgage rates.
According to recent data, two out of five people in the UK have struggled to pay their mortgage or rent as a result of inflated costs – some have even had to choose between food and keeping a roof over their head. What’s more, the average age of purchasing a first home has increased to mid 30s as young people simply can’t afford mortgage repayments.
Below you will find a number of reactions from property experts who explain how today’s news will affect the sector. This story will be updated throughout the day.
Paresh Raja, CEO of Market Financial Solutions
‘The base rate has finally been cut, easing the barriers that have constrained the UK property market amid two years of high inflation and borrowing costs. I expect to see increased market activity in the coming weeks as a result.
‘In recent months, we’ve seen a growing sense of optimism. With property prices and the volume of homes coming onto the market on the rise, today’s decision will likely encourage investors who have been holding back to re-engage. Despite the rate cut, however, borrowing costs remain extremely high, so flexibility for borrowers and brokers remains essential.
‘Therefore, any potential rebound in the UK property market will hinge on the specialist lending sector. A recent survey shows that a substantial majority of bridging lenders expect loan volumes to rise over the next year. Given the uncertainty about future rate cuts, lenders should be offering a range of product options to accommodate brokers’ and borrowers’ needs and interest rate expectations. This will help them take full advantage of the opportunities created by the rate cut, even if further rate changes do not occur immediately.’
Jatin Ondhia, CEO of Shojin Property Partners
‘The consecutive months of target level inflation were clearly enough for the Bank of England to finally give the green light to reduce interest rates. The decision is a key indicator of the growing sense of economic stability and will likely open up new opportunities for investors as they reassess how to manage their portfolios.
‘The impact of the high inflationary-high interest environment of the last couple of years cannot be underestimated. Homeowners have faced higher mortgage rates than at any point since the financial crisis, while developers have found it harder to access much-needed finance. [The] decision hopefully signals a clear transition away from this challenging period.
‘Looking ahead, alternative investments are likely to play an increasingly important role in investors’ portfolios. While the base rate has now fallen, it’s from a 16-year high – interest rates still remain significantly above the levels that many landlords had become accustomed to before the hikes. As such, diversification will remain a prominent trend going forward, with a balance of savings products and lower-risk investments alongside higher-risk opportunities to provide potential for greater growth.’
Ben Nichols, interim managing director at RAW Capital Partners
‘The Bank of England clearly feel as though the perils of high inflation have been addressed by their action on interest rates and the rate hiking cycle has finally come to an end, allowing homebuyers, investors and BTL landlords alike to take a breath and plan their strategies with greater confidence and freedom. After rates reached their highest level in 16 years, today’s decision will provide much-needed relief, and I expect to see an uptick in activity in the UK property market as a result.
‘Recently, sellers have flocked to put their properties on the market, and estate agents have noted an increase in buyer demand. What’s more, official figures show that house prices have grown for three consecutive months, while mortgage approvals have held steady near their highest level in 18 months. This indicates that the market was stabilising well before today’s rate cut. In this context, the additional impetus from the MPC today is likely to encourage hesitant investors and buyers to resume their investment plans.
‘However, while we can celebrate a rate cut after two years of hikes and pauses, it is important to remember that rates are still very high in comparison to where they have been in recent memory. For a surge in activity to materialise, brokers and their clients must be equipped with the tools they need to confidently execute their investment plans. Lenders must recommit to offering a wide range of bespoke and flexible financial products to support the property market’s continued recovery.’
Aaron Milburn, UK managing director at Pepper Advantage
‘[The] rate cut will be extremely welcome news to borrowers, especially those that are struggling and the millions of homeowners set to refinance in the coming months. It will also help stimulate demand for new originations, which grew in Q2 to the highest levels since 2022.
‘Q2 data from our loan portfolio shows the strongest reasons yet for optimism, with UK residential mortgages arrears down for the first time since the 2022 mini-Budget, but it is too early to celebrate. Some customer groups – notably buy-to-let mortgage holders – are showing warning signs, with buy-to-let arrears up 11% in Q2 compared to Q1.
‘Moreover, there will be a lag before borrowers feel the benefits of this cut and the impact of slightly lower rates on monthly repayments is likely to be modest. Despite today’s action, there is still a long way to go in the UK’s transition from a higher-rate environment.’
Rachelle Earwaker, senior economist at the Joesph Rowntree Foundation
‘[The] cut will allow struggling families with mortgages and unsecured loans some breathing space after years of additional financial pressure from high rates.
‘These high interest rates have taken a toll on household finances and will continue to do so as rates remain elevated. Around 7 in 10 low-income mortgage holders – 1.2 million households – went without essentials like food or a warm home in the six months to May 2024. Millions of mortgage holders across the UK face paying hundreds of pounds more in repayments each month than they did two years ago as fixed rate periods came to an end, and this is only exacerbated if you’re on a low income.
‘3.8m low-income households also reported holding loans in May 2024 that were originally taken out to pay for essentials like food or housing. They’ll now hopefully pay less in interest that they would have without this cut.
‘However, while today’s news is positive, high interest rates aren’t the only cause of hardship being experienced right now, and we urgently need to see more detail about what the Government intends to do to address the current crisis in living standards.’
Image: Kai Pilger
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