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How interest rates affect the local economy

Interest rates are incredibly important when it comes to the property market. If they are low they can help drive the local economy forward but if they rise, particularly if they rise rapidly, they can crash the economy and especially the property market within a matter of months.

Historically, the Bank of England show their interest rates going back as far as January 1975 when they were 11.25%; there were then 23 changes in just over a year and by 7th October they had risen to 15%. By 1977 they had dropped back to a low of 5.5% for one month but mostly continued to be in double digits through the 1970s and 80s. In the 1990s they hovered around 5-7% and post the millennium they ranged from 4-6%, hitting a high of 6% in February 2000, following a low of 3.5% in July 2003.

When the credit crunch hit in 2007, in an effort to slow down and minimise a disastrous recession, the government started to reduce rates until they hit an all-time low of 0.25% in August 2016. They currently rest at just 0.5%.

Since 1975, property prices and the economy have had several ‘booms and busts’, mostly coinciding with high interest rates or, since the credit crunch, low ones.

Because mortgage rates generally reflect interest rates, they tend to dictate the cost of buying and owning a home. When interest rates go up, mortgage rates tend to follow, which increases the cost of buying and owning a home, in turn reducing demand. This then typically causes property price growth to slow or even fall. Feeling ‘less wealthy’, people then tend to rein in their spending, especially on home improvements, so a poor property market tends to reduce the success of the economy, too.

However, this key relationship between interest rates and the property market has started to change, especially since the credit crunch, for three main reasons:

1.      With more baby boomers paying off their mortgages, nearly half (48.26%) of property owners in England own them outright, with no mortgage

2.       According to data from UKHPI, nearly a third (just under 30%) of properties were bought with cash in 2017 and this continued into the first half of 2018 (per thisismoney.co.uk)

3.      Approximately 50% of households are ‘fixing’ their mortgage rates for a period of time, which cushioned them from interest rate changes.*

In Tunbridge Wells:

·        Approximately 35% of property owners own properties outright, with no mortgage [1], above the average in England of 27%[2]

In addition to these changes in the way the property market works, small rate rises aren’t as likely to affect property demand because interest rates are so low at the moment.  Although a rate rise would of course increase the cost of owning a home, mortgage rates are currently so low and fewer people have a mortgage. Of those who do, nearly 50% are on fixed rates, so any rate rise would be likely have less of an impact than it would have had in the past. This means in reality, interest rate rises will still affect the property market, but the impact is likely to be lower, especially in an area like Tunbridge Wells.

However, if you want to keep your costs to a minimum when investing in property or buying a home, one thing that is always worth doing is to check you are on the best mortgage rate. If you haven’t reviewed your mortgage in the last 12 months, or you are coming to the end of a fixed rate, do come and talk to me and our Mortgage Advice Bureau who will together make sure you are on the right mortgage rate for you.






[1] Borough of Tunbridge Wells Housing Needs Study 2018

[2] Q2 2018 statistic from Resolution Foundation report published Jan 2019

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