It was bad news for homeowners recently, due to the Bank of England’s interest rate hike by a massive 0.5 percentage points, bringing it up to 5%. This is the 13th consecutive increase since December 2021, and will drastically affect the 1.4 million households on a variable-rate mortgage.

What does this mean for homeowners? For those with a 5.5% tracker mortgage, their pay rate will rise to 6%. On a £150,000 repayment mortgage with 20 years remaining, this means their repayments will increase by £43 a month – from £1,032 to £1,075. 

This may seem like a small increase; however, in June last year, these same households were paying only £776 per month, so they are now paying £3,588 more per year.

What about households with a £500,000 tracker mortgage with 20 years remaining? Their monthly payments will increase from £3,439 to £3,583. In December 2021, these homeowners’ mortgages would have been costing them £2,356 a month, so their annual payments have gone up by a staggering £14,780 in just 18 months.

Those on fixed-rate mortgages will be unaffected for the time being by the recent rate rise, but only until their deal expires. So for over 350,000 borrowers who are due to come off their fixed-rate deal between now and the end of September, they are going to be in for a huge shock as many will have had deals around 2%.

The rate rise is also going to hit anyone hard who is looking for a new mortgage. The market has already been in turmoil, with hundreds of mortgage products being repriced or pulled altogether in the past few weeks.

Buying and selling houses and real estate prices concept. Woman using calculator to count rent, money or home insurance cost. Calculating mortgage and loan or investment…

How Interest Rates Affect the UK Housing Market

It’s important to grasp the fundamental mechanism behind the influence of interest rates on the UK housing market. Interest rates, set by the Bank of England’s Monetary Policy Committee, determine the cost of borrowing money. They directly impact mortgage rates, which, in turn, influence housing demand, affordability, and prices.

The Impact of Rising Interest Rates on Housing Prices

Higher interest rates tend to cool down the UK housing market by making mortgages more expensive. As mortgage rates rise, borrowing becomes costlier, which can lead to decreased demand for homes. Consequently, this reduced demand puts downward pressure on housing prices. Homebuyers find it more challenging to afford properties, and sellers may need to adjust their pricing expectations accordingly.

The Effect of Falling Interest Rates on Housing Prices

On the other hand, when interest rates decline, the UK housing market often experiences increased demand and rising prices. Lower borrowing costs make mortgages more affordable, enticing potential buyers into the market. This surge in demand can drive up housing prices, as buyers compete for available properties. Homeowners may benefit from capital appreciation as the value of their properties rises in response to heightened demand.

Mortgage Affordability: Balancing Interest Rates and Housing Prices

One crucial factor that determines the health of the UK housing market is the delicate balance between interest rates and housing prices. While lower interest rates can make mortgages more affordable, rapidly rising housing prices can offset this advantage. It’s essential to consider both factors when assessing the overall affordability of homeownership.

The Role of Affordability in Housing Demand

Mortgage affordability is a key driver of housing demand. As interest rates decrease, monthly mortgage payments decrease, allowing more potential buyers to enter the market. This increased affordability often translates into heightened demand for housing. Conversely, when interest rates rise, mortgage affordability decreases, limiting the pool of potential buyers and potentially dampening demand.

The Importance of Housing Supply

In assessing the impact of interest rates on the UK housing market, it’s essential to consider the role of housing supply. The interaction between supply and demand influences the equilibrium price and overall market dynamics. While interest rates directly impact demand, they can indirectly affect supply through their influence on developers’ decisions and the availability of construction financing.


Interest rates play a significant role in shaping the UK housing market. The intricate relationship between interest rates, housing prices, and mortgage affordability impacts both homeowners and potential buyers. While lower interest rates can stimulate demand and drive up prices, higher rates can cool down the market and make homeownership less affordable. Understanding the dynamics of interest rates and their effects on the UK housing market is crucial for making informed decisions in the ever-evolving property landscape.