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Mortgage trends and interest rates - what could happen in 2022?

As 2021 draws to a swift close, there is much speculation about what 2022 will have to offer.

Despite the emergence of the Omicron variant, which has caused wobbles in financial markets across the world, and the reimposing of restrictions and travel bans, the Bank of England decided on Thursday to increase rates back up to 0.25% from record lows of 0.1%. This comes in the face of soaring inflation and is the first rise in nearly three years, after Brexit/election uncertainty and then Covid had puts plans to hike interest rates on ice.

Here, founder and chief executive of UK Adviser, Maxim Cohen, explains what changes in mortgage trends and interest rates we can expect in 2022.


Why are interest rates likely to rise?

The base rate, also referred to as the bank rate, is put forward by the Monetary Policy Committee of the Bank of England.

This serves two main purposes. One is to regulate the UK economy in a way that allows it to flourish and the other is to decide which level it will lend money to banks.

Interest rates have a drastic impact on savings, mortgages, borrowing costs, and pensions so these upcoming changes to the base rate are likely to affect most UK businesses and households.

Initially, interest rates were cut due to the coronavirus outbreak. Since the very start, lockdown measures that were a response to the outbreak left businesses no choice but to close and they also caused countless job losses – or jobs being put on hold.

As a response to the outbreak, to lower the costs businesses and households must pay and make loans cheaper, two cuts were made to the base rate. As a result, it sat at a record low of only 0.1% until this week.

Since new cases of the Omicron variant were discovered across the UK, it was anticipated that interest rates wouldn't rise after all, but the MPC decided they needed to act as the cost of living rose by 5.1% in the year to November - the highest rate since September 2011 and well above the Bank's 2% inflation target.

This latest interest rate rise is only very gradual, so shouldn't have too much impact on borrowers or savers, but further interest rate rises are expected for the new year to combat rising inflation.

Mortgage rate changes and the future impact

When interest rates rise, this also affects mortgage rates, meaning many mortgage repayments are likely to increase.

The good news is a high number of people across the UK are using fixed-term products, meaning that many Brits will not be subject to immediate changes to the cost of monthly repayment rates.

On the opposite side of the spectrum, those who have variable mortgages such as tracker mortgages will see immediate changes to costs. This type of mortgage follows an added rate as well as the Bank of England’s base rate as the standard.

Many homeowners and prospective homeowners are already struggling due to the cost of the items they use in day-to-day life increasing in price, with inflation continuing to soar.

If the mortgage rates do increase, as they will now be expected to, many Brits will find it more expensive to borrow throughout the upcoming months.

Mortgage trends to continue

Although interest rates have now risen and are expected to rise again, mortgage trends such as low-cost deposits and high loan-to-value mortgages are set to continue, putting prospective homeowners at greater ease.

The housing supply and demand discrepancy has increased house price growth through the UK, and it has also made the market a very competitive one. This trend seems guaranteed to feed into 2022.

Another trend that we can expect to see in 2022 is the ratio of average home prices to earnings remaining extortionately high. Recent figures show for first-time buyers the average house price is five times more than standard earnings. In areas such as London, the ratio is over 10 times more.

Low-cost deposits make purchasing a home more attainable as putting together a hefty deposit is often impossible for people on lower incomes.

Throughout 2022, good borrowing/lending conditions and schemes like the 95% mortgage guarantee scheme will continue to help prospective buyers own a property of their own.

With interest rate changes and potentially more on the way, coupled with current mortgage trends remaining in play, now is the time to weigh up all options available.

The UK Adviser takes a holistic view and suggests the best methods that suits individual circumstances.

Whether a first-time buyer, portfolio landlord, or business owner, The UK Adviser can help you throughout your financial endeavours.

*Maxim Cohen is founder and chief executive of UK Adviser


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