Rate cuts alone will not rescue Britain’s stalling housing market
John Davison of Perenna argues that more flexible, long-term fixed-rate mortgages could give homeowners the confidence and freedom to move.
Every Bank of England decision now prompts the same question: will lower rates ever return, and can they help get Britain’s housing market moving again?
August’s inflation figures offered no simple answer. The Consumer Price Index (CPI) rose to 3.1%, up from 2.6% in June, even while the Bank of England held the Bank Rate at 3.75%. With new predictions coming to light that we are on track for four rate rises in a row, we have yet another reminder that households cannot rely on borrowing costs falling any time soon.
Even if cuts do come, lower rates will solve only part of the housing market’s problem. Rates affect how much people can afford to borrow. They do not remove the practical and financial barriers that can prevent existing homeowners from moving.
The latest activity figures make that distinction important. According to HMRC’s latest property transaction data, seasonally adjusted residential transactions fell by 2% between June and July and were 1% lower than a year earlier. This is not a market in freefall, but it is one struggling to build momentum.
Affordability is clearly part of the explanation; higher household costs reduce the amount buyers can borrow or are willing to spend, while current mortgage pricing continues to test household budgets. A quarter-point rate cut would help at the margin, but it would not immediately transform either of these factors. The old saying still holds true; up like a rocket, down like a feather.
The housing market needs sellers as well as buyers
The housing market depends on more than generating new demand. It needs existing homeowners to be willing and able to sell.
Consider a homeowner selling a smaller property to buy a family home. Their sale may provide a first-time buyer (FTB) with their chance to take the first step onto the ladder, while their purchase allows another household to make its next move. If the original homeowner decides that moving is too costly or uncertain, several potential transactions can disappear with them.
This is why mortgage design matters. Products should not introduce another financial obstacle into housing chains that are already vulnerable to delays and changing circumstances. To keep those chains moving, homeowners need mortgages that offer certainty over their monthly payments without making it prohibitively expensive to move if their circumstances change. As household finances come under greater pressure, borrowers may feel safer securing a five or even ten year fixed rate mortgage. But with most lenders, that means early repayment charges and a costly penalty if the borrower needs to sell or wants to move.
Certainty should not mean being stuck
When the outlook for rates is uncertain, fixing a mortgage for five or ten years can give households valuable security over their largest monthly outgoing. However, borrowers may be reluctant to make that commitment if moving home before the fixed term ends could leave them facing a substantial early repayment charge.
Although most mortgages are portable, moving is still treated as a new mortgage application and borrowers must meet the lender’s affordability checks and other criteria. Any additional borrowing may also need to be taken on different terms. If porting is not possible, the borrower may have to choose between paying an early repayment charge and abandoning the move.
That leaves homeowners facing an unnecessary trade-off: accept greater exposure to changing rates through a shorter fix, or secure their repayments for longer while taking the risk that a future move becomes more expensive.
People do not plan a new job or a growing family around the end date of a mortgage deal. Products should reflect that reality and we must design them as such.
A long-term fixed-rate mortgage with no early repayment charge when the customer sells or moves would not make an unaffordable home affordable. Nor would it replace the need for lower borrowing costs. But it would give homeowners certainty over their monthly payments without asking them to give up the freedom to move when their lives change.
That could make a real difference to the wider market. When existing homeowners feel able to move, they free up properties for other buyers and help chains progress. Mortgage products need to reflect how people actually live, offering security when rates are uncertain but enough flexibility to move when work, family or other circumstances change.
John Davison is head of product, proposition and distribution at Perenna
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