Interest Rates and Housebuilding Firms (SCQ)

Here is a suggested answer to one of the short context questions in the AQA A Level Grade Booster workshop booklet (2017) which is about the effect of changes in interest rates.

Explain one way in which a reduction in interest rates might affect a large house building firm

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One way that a reduction in interest rates might affect a large house building firm is by increasing the demand for new-build houses.  Demand for new houses from potential homeowners is affected by several factors, two important ones of which are the price of the house and the finance cost of taking out a mortgage to buy the house. A reduction in interest rates by the Monetary Policy Commission may in turn lead to a fall in the interest rate charged by building societies and banks on mortgages. This should then make a mortgage more affordable for home buyers by reducing the interest element of the monthly mortgage payment, thereby enabling home buyers to afford a larger mortgage or be able to take one out in the first place.