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How interest rate rises are affecting UK mortgages

Line of terraced homes. The cost of living has surged as the Bank of England battles to tame 40-year high inflation. Photo: Getty
The cost of living has surged as the Bank of England battles to tame 40-year high inflation. Photo: Getty (Richard Newstead via Getty Images)

Britain's housing market is facing a downturn as rising interest rates start to bite into the sector, leaving homebuyers clutching their pursestrings as the cost of living surges.

The latest figures from the Bank of England (BoE), which show approvals fell more than expected in June, have solidified the bleak outlook as high street banks ring the alarm over slowing mortgage loans growth.

Meanwhile, consumers have also significantly stepped up their borrowing despite incomes dropping, both signs that the cost of living crisis is tightening its grip on the economy.

Read more: BoE: UK mortgage lending plummets and consumer borrowing soars


Analysts have said that the so-called race for space fuelled the mortgage market during the pandemic but there are signs this is starting to cool.

"There are turbulent times ahead as mortgage activity drops, credit card lending surges and our savings plunge," Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown said.

"The pandemic fuelled our savings habits and made us less likely to flash the plastic while our need for more space kept the property market running red hot."

Watch: Will UK house prices ever fall?

What has happened?

Property prices in Britain have soared to record levels over the past two years, with many buyers chasing bigger homes away from city centres as the COVID pandemic struck.

That has seen high street banks enjoy higher returns amid a boom in the mortgage market while the base rate was at rock-bottom and lenders competed fiercely to pour capital into home loans.

However, the BoE has since opted for five back-to-back 25 basis points rate hikes to tackle record high inflation. UK interest rates now stand at a 13-year high of 1.25%.

Read more: Mortgages harder to get as lenders factor in cost of living rise

That has trickled into banks, which have reported dwindling mortgage loans growth as house prices continue to soar.

The average price of a first-time buyer type property hit a new record across the UK of £224,943, analysis from property site Rightmove (RMV.L) revealed.

On Friday, NatWest (NWG.L) reported net mortgage growth of £3.3bn ($4bn) in the second quarter, down from £3.6bn in the same period last year.

Meanwhile, Barclays (BARC.L) said growth in home loans was near stagnant, while Lloyds Bank (LLOY.L) predicted property prices to fall in the year ahead.

UK interest rates
UK interest rates. Chart: Yahoo

How does it affect your mortgage?

The pressure on home owners will only get worse with Threadneedle Street estimating that around 40% of mortgages will go up over the next 12 months as the central bank continues to increase interest rates.

Lenders authorised 63,726 mortgages last month, down 3% from May and the lowest level in two years, according to the BoE.

At the same time, net mortgage borrowing fell from £8bn in May to £5.3bn in the period, although that is still above pre-pandemic levels.

Read more: UK property: How house prices are changing where you live

The BoE's data showed the effective rate on new mortgages rose to 2.15% last month, the highest level since late 2016. The value of mortgages advanced dropped to £5.3bn, down on the previous six-month average.

Morrissey said: "Approvals for house purchases fell below the pre-pandemic 12-month average as the cost of living and increasing interest rates make people think twice about making a bid for a new home.

"It adds to the growing body of data pointing towards a slowdown in the coming months as homes that were once snapped up take longer to sell and sellers become more likely to tweak asking prices."

Watch: How does inflation affect interest rates?