How will UK property market react to eventual interest rate rise?

Whether we like it or not UK base rates will increase sooner rather than later especially after the move by the US Federal Reserve. The move in America, confirmed yesterday, was not unexpected with mortgage rates creeping higher over the last few months. The same can be said of the UK base rate situation with the Bank of England hinting on a number of occasions that a move was “just around the corner”.

While there have been certain economic hiccups along the way it does seem inevitable that UK-base rates will increase sooner rather than later. So, how will this impact the UK property market?

Mortgage rates

There will be an inevitable move higher in UK mortgage rates as and when the Bank of England decides to increase base rates. This has started to happen with an array of cheap mortgages disappearing from the marketplace in preparation for the eventual move higher. As mortgage rates do move higher, although this would be gradual rather than overnight, this will increase the cost of finance and under new mortgage regulations more people will be barred from arranging finance they cannot afford.

Demand for UK property

While the UK property market is still at relatively high levels, especially when compared to European counterparts, demand for UK property will be hit as the cost of finance moves higher. This is inevitable, as we touched on above, as it will impact the so-called affordability factor. Whether we see a sudden increase in activity on the buying front ahead of the eventual rise in base rates remains to be seen because in many areas of the country the affordability factor is already kicking in.

However, the UK property market has a habit of beating the odds and attracting more and more investors going forward. Much of this is down to the lack of affordable housing and relatively low numbers of new builds and this is unlikely to change in the short term.

Will a base rate rise weigh on sentiment?

Perhaps one unforeseen consequence of the eventual increase in UK base rates will be the confirmation that UK base rates have turned. As soon as we see the inevitable move upwards we will then see a flurry of experts speculating on the next move. If we look back to the more traditional economic environment prior to 2008 initial turning points in base rates would normally lead to a relatively quick second increase. This is unlikely to happen in the UK in the short term primarily because of the fragile worldwide economic and political situation – it would not take a massive shock to hit investor sentiment which is something the Bank of England will need to take into account.


The fact that the cost of finance will increase in the UK as base rates eventually move higher is a given. What is uncertain at this moment is the issue of affordable housing and new builds which is squeezing UK prices higher. These two particular elements are unlikely to change in the short to medium term therefore a rise in interest rates may not have such a major impact on the UK property market?

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