Despite interest rates reaching their highest level in 15 years, Nationwide has reported a steady number of mortgage applications, indicating that potential homebuyers are undeterred by the increased borrowing costs. However, the building society cautions that the significant rise in interest rates is likely to have a notable impact on housing market activity.
Nationwide’s latest data reveals a 3.5% drop in house prices in the year leading up to June, marking the largest decline since 2009. This downward trend is attributed to the Bank of England’s decision to raise interest rates in an effort to curb inflation.
Rob Gardner, Nationwide’s chief economist, highlights the strain on homeowners’ finances, with mortgage repayments now accounting for nearly 40% of people’s average take-home pay, compared to 30% previously. Despite this, the increase in borrowing costs has not yet had a negative effect on consumer sentiment or the number of mortgage applications, although confidence indicators remain below long-term averages.
The Bank of England’s data shows that mortgage approvals have actually increased, rising from 49,000 in April to 50,500 in May. Similarly, remortgaging approvals have seen a rise from 32,500 to 33,600 during the same period, despite the higher rates for mortgage deals.
The impact of higher interest rates on mortgage holders is expected to be gradual due to the prevalence of fixed-rate deals. Currently, only 15% of mortgage holders have deals linked to variable rates, compared to 70% two decades ago. However, it is worth noting that approximately 400,000 fixed-rate borrowers will be refinancing every three months, and with mortgage rates reaching 6% for a two-year deal, the typical monthly payment is projected to increase by £385.
Nevertheless, Mr. Gardner reassures borrowers that they were stress-tested at interest rates above the current market levels, ensuring their ability to cope with such an increase. He further explains that as long as the job market and interest rates perform as expected, the UK housing market is unlikely to experience significant forced selling that could result in a disorderly adjustment.
Nationwide’s report highlights that all regions, except Northern Ireland, have witnessed a decline in annual house prices. London has experienced a year-on-year decrease of 4.3%, while the North West has seen prices down by 4.1%.
