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Mortgage Rates Climbing - Impact on UK Economy

Geoff Riley

25th September 2022

With the Bank of England raising monetary policy interest rates, the cost of taking out and servicing the interest on a home loan is also climbing higher. This will hit many home-owners hard in the months ahead.

Mortgage Rates Climbing - Impact on UK Economy

Most new home loans in the UK over the last ten years have been in the form of a fixed rate. This is when a property-buyer takes out a mortgage loan where the interest rate is fixed for a period – perhaps 2 years or even longer – before the interest rate comes up for re-adjustment.

The cost of an average mortgage is now starting to rise quite sharply and more increases are expected if the central bank continues to tighten monetary policy. A huge number of people with fixed rates face a sharp interest rate adjustment at some point in the next 12-18 months.

Read: Mortgage lenders put up interest payments before Bank’s base rate hike (Guardian)

Read: Interest rates rise: latest hike to 2.25 per cent will see £1,500 added to London first-time buyer mortgage payments (Evening Standard)

Higher mortgage interest rates will have a significant effect on the economy:

  • Harder for first-time buyers to afford a home loan
  • Increased interest-payments on mortgages will reduce the effective disposable income of property buyers
  • Potentially higher profits for the lenders – but also risks from an increase in mortgage loan defaults
  • We expect to see a slowdown in house price inflation even with the cuts in stamp duty

It will be interesting to see which effect is stronger - the boost to housing demand and property prices from the government's decision to cut stamp duty. Or the consequences of a sharp rise in mortgage interest rates which is the direct result of a tightening of monetary policy by the central bank. My instinct is that the latter will hold sway. Mortgages will be harder to get and the cost of servicing the debt is set to climb sharply higher into 2023.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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