Interest rates destroying homebuyers’ buying power -

Interest rates destroying homebuyers’ buying power

Ongoing interest rate hikes in the UK are taking their toll on homeowners, with many finding that their variable-rate mortgage repayments have rocketed. However, these rises are also increasingly destroying the buying power of potential homebuyers, with many first-time buyers seeing their hopes dashed as rates climb.

Following a series of 0.25% rate hikes coupled with two bumper 0.5% hikes since last December, the UK’s base rate has soared to 2.25%. There are predictions that the property market will now weaken as many first-time buyers are now struggling to get onto the property ladder. Many have no option but to rent, but with rents also rising, they are in a challenging position.

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Property prices could drop by 12%

Economists are warning that house prices in the UK could drop by up to 12% due to interest rate hikes eliminating the buying power of those looking to purchase their first property. According to Halifax data, the property market was already cooling before mortgage rates increased further, with a drop of 0.1% in house prices between August and September.


Figures from Moneyfacts show that the average interest rate on a two-year fixed-rate mortgage has now passed 6% for the first time in 14 years. Following the recent mini-budget from the chancellor, Kwasi Kwarteng, the pound hit rock bottom, and economic uncertainty coupled with speculation over interest rate hikes led to mortgage lenders pulling many deals.

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While lenders have since reintroduced many deals, they have been re-priced with higher interest rates. This has put homebuyers in a challenging position, and with the Bank of England hinting at further interest rate hikes, the situation could worsen.

Demand for rental homes could increase due to the difficulties facing homebuyers, but with rents also rising, this could lead to further issues. According to experts at Knight Frank, there could be an increase of 20% in rental costs over the next five years.

buying power

Additional pressure due to soaring living costs

First-time buyers are not only facing issues with soaring interest rates, but they also have to deal with the rocketing cost of living. With everything from food and petrol to energy and household bills on the rise, this has put them under even more financial pressure.

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Andrew Wishart, a property economist at Capital Economics, said: “That destruction of buying power prices first-time buyers out of the market. Many simply can’t afford to buy at current prices.”

According to Capital Economics, the drop in house prices will be counteracted by ongoing rises in inflation, making it very difficult for first-time buyers to save a decent deposit for a home.