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How will interest rate rises affect mortgages and sales?

The Bank of England increased interest rates last week from 0.5% to 0.75% after years of historic lows, spurred by increasing economic capacity and business activity.

The impact on most people will be minimal. Most people with large mortgages are on fixed rates, so the increase has zero impact. The proportion of borrowers with variable mortgages – which move up and down in price as the base rate changes – has fallen to only 35% compared with 70% in 2001.

For those with variable or tracker mortgage, increases in monthly payments aren’t likely to break the bank for most borrowers. Monthly prices for those with variable or tracker mortgages could increase by as little as £7 a month, although those with a mortgage matching about the average property value in the UK today could see their monthly premiums increase by between £25 to £37.

Although the interest rate rise will affect some homeowners, it is expected to have little effect on buyer behaviour or activity.

Since the financial crisis in 2007, mortgage lenders have set new, more conservative affordability standards in place for buyers, so those looking to apply now as opposed to a month ago shouldn’t notice a substantial difference in their level of buying power.

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Nationwide’s chief economist noted that: “Looking further ahead, much will depend on how broader economic conditions evolve, especially in the labour market, but also with respect to interest rates. Subdued economic activity and ongoing pressure on household budgets is likely to continue to exert a modest drag on housing market activity and house price growth this year, though borrowing costs are likely to remain low.”