Interest rates rise: Knight Frank's experts give their views on potential impact on property market

Simon Gammon, Managing Partner, Knight Frank Finance

“We are witnessing the Bank of England raising their base rate for first time in a decade. It has been a long 10 years since the base rate last went up, so today represents the first time many UK borrowers will have ever experienced an increase in their mortgage payments. The 0.25% lift in the base rate will likely be passed on to borrowers on variable rate mortgage deals almost immediately – with a material effect.

"Although the base rate is still just 0.5%, this quarter point increase translates into an extra £250 a year in interest for every £100,000 of borrowing. Someone therefore with a £500,000 mortgage will be paying more than £100 extra in interest every month. Only those on a fixed rate deal are likely to avoid some sort of increase.

"The question is, does this rate rise signal the start of a series of future base rate increases? While it could be actioned over a long period of time, is the country finally starting to move towards a normalisation of the base rate away from ultra-low levels? Libor and swap rates, the money market rates which determine fixed-rate pricing had risen in anticipation of the rate rise, and this may continue if further rises are anticipated.

"As mortgage lenders adjust to this new landscape, home loan deals are likely be launched and withdrawn at a rapid pace. In a rising rate environment we can expect the mortgage market to become more volatile for a while.

"Mortgage lenders, keen to meet their lending targets, will continue to play with rates to ensure they are in the best-buy tables, resulting in some ‘jostling’ in the market. When rates are being launched and withdrawn so quickly, borrowers will want to make sure they have access to the most up-to-date information to enhance their opportunity of getting the best deals.

"The argument for taking a fixed rate, is ever stronger. Borrowers who spot a good mortgage deal in the coming months should grab it.”

James Roberts, Chief Economist, Knight Frank

“An increase in the base rate is often viewed with trepidation by the property industry, but this long expected move is unlikely to have a negative impact. I expect the Bank of England will follow the same strategy as the US Fed, and gently apply the brakes while giving lots of advance warning, in order to balance the competing pressures of normalising rates while not derailing growth.

"Consequently, I see a gradual rise ahead, partly to stockpile some future rate cuts should the MPC need to combat another downturn at a later date.

"Also, the Bank of England is showing some younger homeowners that rates do actually rise, given how long it has been since the country saw an increase - the last UK rate hike in 2007 came a few days after the first iPhones went on sale.

"For commercial property, it should be remembered that debt has played far less of a role in the market in recent years than was the case prior to the financial crisis.

"Commercial property yields are not strongly correlated to interest rates, so I do not see a small rate increase having much of an impact. Indeed, in some markets the re-emergence of rental growth, such as for offices in districts popular with technology firms, should keep investors active.”

Grainne Gilmore, Partner, Head of UK Residential Research, Knight Frank

“The first increase in the base rate in a decade is a notable event, especially as there is a feeling that this may be the first step in a series of rate rises. However, seen in isolation, this quarter-point rate rise only reverses the cut seen last year, and the base rate is still at a historic low.

"Even if there are two more rate rises in the next year or so, the base rate will still be at a notably lower rate than seen in any other period of history since the Bank records started in 1690."

"Some mortgage holders will see their repayments affected by the change in rates, and mortgage rates on new home loans will rise, but in terms of the residential market, the move is unlikely to have an impact on overall pricing, although some rents may edge up if buy-to-let landlords affected by the change pass on their increased costs to tenants.

"However, if there is another rate rise in the coming months, confirming the country’s move into a rate rise environment, this may have a wider  effect on sentiment in the market.”

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