House prices to rise in 2025 as buyers could take out larger mortgages

House prices could rise significantly next year, according to one mortgage lender, as buyers’ borrowing power will be boosted by falling interest rates.

MPowered Mortgages predicts that 2025 could see a major turnaround in house prices, which rose a modest 2.8 per cent in the year to August, according to the latest figures from the Office for National Statistics.

Landlords would also benefit from the combination of lower interest rates and higher rents, meaning their profits could increase.

Markets are currently predicting that the Bank of England will cut the base rate to 3.5 percent by the end of next year, although predictions vary.

This week, investment bank Goldman Sachs said it expects the base rate to be cut to 2.75 percent by the end of next year, while Santander gave a more guarded forecast of 3.75 percent.

Experts at MPowered Mortgages believe that if the base rate falls to 3.5 per cent next year – as some analysts predict – some mortgage borrowers could find themselves able to borrow up to 18 per cent more.

This is because sustained base rate cuts should result in mortgage lenders relaxing the affordability ‘stress tests’ they subject borrowers to.

Most lenders look at borrowers’ finances and assess whether they would still be able to make their payments if the interest rate were to increase after their initial fixed-rate agreement ends.

The calculation is usually based on the lender’s standard variable rate (SVR) plus a certain percentage. At the moment, this means some lenders are testing that borrowers could afford a mortgage rate of around 8.5 percent.

This means that after the initial fixed period, if the borrower does nothing and falls into the lender’s SVR, they should be able to afford the higher monthly costs.

Lenders’ standard variable rates tend to fall when the Bank of England reduces the base rate, although this is at the discretion of each lender.

Peter Stimson, head of product at MPowered Mortgages, says this will mean house-movers and first-time buyers will be able to borrow more.

Some people who can currently borrow up to £200,000 could see that rise to £236,000 next year, subject to affordability checks.

This, according to Stimson, could be a boost to house prices.

Stimson says: ‘Lenders base their affordability not on the interest rate the borrower will pay on their mortgage, but on an interest rate they “could” pay in the future.

‘They will check that the borrower can still meet their monthly payments, plus all other necessary budgeted expenses, if mortgage rates were to rise to this amount.

“As the base rate falls, so will the SVRs and therefore the stress rate calculation.”

He says the minimum rate lenders tend to stress test is around 7 per cent, although this could still make a substantial difference in borrowing power compared to the current 8.5 per cent or more.

House price growth is already increasing

There are already signs that the rise in house prices is beginning to accelerate.

Nationwide’s latest house price index, which reflects mortgages lent in September, shows house prices have risen at the fastest pace for two years.

Stimson says a combination of rising wages, lower mortgage stress tests and reduced rates could see prices take off in 2025.

‘Wages have risen around 14 per cent in the last two years, according to the ONS, while house prices have seen little change.

“House prices are largely a function of mortgage affordability and what has prevented them from growing over the past two years is a combination of high interest rates and lenders’ stress testing calculations on affordability.” of mortgages”.

Is a buy-to-let resurgence predicted?

Stimson isn’t the only one who thinks house prices are likely to rise.

Rob Dix, co-founder of property advice website Property Hub and co-host of The Property Podcast also believes a boom in house prices is possible next year.

He says property is starting to look like an attractive investment again thanks to rising rents.

Average rents have risen 40 percent since June 2020, according to HomeLet, after rising just 4.4 percent between June 2016 and 2020.

According to estate agent Hamptons, the average gross rental yield on a newly purchased home in England and Wales has reached a record 7.2 per cent.

The figure has increased from 6.7 percent last year and 6.2 percent in 2022.

The gross rental yield is the percentage return an investor can expect to earn on the purchase price each year, before taking into account taxes and other costs.

For example, if a landlord earned £10,000 in rent a year on a £200,000 property, the yield would be 5 per cent.

The increase in yields has occurred thanks to the increase in rental prices since 2020 and the effective stabilization of house prices from 2022.

“A housing boom would have seemed ridiculous a couple of years ago,” says Dix, “but it’s looking more and more possible.”

“The sector has been hit by everything (rapidly rising interest rates, new legislation, rumors about tax treatment) and prices are still just below their 2022 peak.

‘Importantly, in inflation-adjusted terms, prices have actually fallen by more than 15 per cent.

“As rents have risen rapidly, this has improved returns for investors and made investing in many areas more attractive than it has been for a long time.”

‘Sentiment among the investors we spoke to is also noticeably better than it has been in a long time.

“This could change quickly, and anything that affects the labor market could cause the situation to change, but as things stand, there is potential for significant price increases in 2025.”