House prices to rise in 2025 as buyers could get bigger mortgages
- Home buyers could borrow more due to interest rate cuts, lender predicts
House prices could rise significantly next year, according to one mortgage lender, as buyers' borrowing power will get a boost from falling interest rates.
MPowered Mortgages is predicting that 2025 could see a major turnaround in house prices, which rose by a modest 2.8 per cent in the year to August according to the most recent 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 be set to increase.
Markets are currently forecasting that the Bank of England will cut the base rate to 3.5 per cent by the end of next year, although predictions vary.
Boom time? Home buyers may find they can borrow more as base rate falls next year, according to Peter Stimson (inset right), the head of product at MPowered Mortgages
This week, the investment bank Goldman Sachs said it expects the base rate to be cut to 2.75 per cent by the end of next year while Santander gave a more reserved 3.75 per cent forecast.
Experts at MPowered Mortgages think that if the base rate falls as low as 3.5 per cent next year - like some analysts are predicting - 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 'stress testing' affordability checks they subject borrowers to.
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Most lenders look at borrowers' finances and assess whether they could still afford their payments if the interest rate went up once their initial fixed rate deal ended.
The calculation is typically based on the lender's standard variable rate (SVR) plus a certain percentage. At the moment, it means some lenders are testing that borrowers could afford a mortgage rate of around 8.5 per cent.
This means after the initial fixed period, if the borrower does nothing and lapses onto the lender's SVR, they should be able to afford the higher monthly costs.
Less stress: Peter Stimson of MPowered Mortgages says lenders' affordability checks could become more lenient
Lender standard variable rates tend to fall when the Bank of England cuts the base rate, though it is at each lenders' discretion.
Peter Stimson, head of product at MPowered Mortgages says this will mean home movers and first-time buyers could find themselves able to borrow more.
Some people that are currently able to borrow up to £200,000 could see that increase to £236,000 next year, subject to affordability checks.
This, according to Stimson, could be a shot in the arm for house prices.
Stimson says: 'Lenders base their affordability not on the rate of interest the borrower will pay on their mortgage, but on a rate on rate of interest they "could" pay in the future.
'They will check the borrower could still afford their monthly repayments, plus all other necessary budgeted expenditure, if mortgage rates were to increase to this amount.
'As base rate drops, so will SVRs and hence the stress rate calculation with it.'
He says that the minimum lenders rate tend to stress test is around 7 per cent, though this could still make a substantial difference to borrowing power compared to today's 8.5 per cent or more.
House price growth is already ticking up
There are already signs that house price rises are beginning to accelerate.
Nationwide's most recent house price index, reflecting mortgages lent in September, shows that house prices have risen at the fastest pace for two years.
Stimson says a combination of rising wages, lower mortgage stress testing and reduced rates could see prices take off in 2025.
'Wages have grown by 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 stopped them growing over the last two years is a combination of high interest rates and lenders' mortgage affordability stress test calculations.'
Buy-to-let resurgence on the cards?
Stimson is not alone in thinking house prices look likely to rise.
Rob Dix, co-founder of property advice website Property Hub and co-host of The Property Podcast also thinks a house price boom is potentially on the cards next year.
Attractive prospect: Rob Dix says 2025 could be a good year for landlords' returns
He says property is starting to look like an attractive investment again thanks to rising rents.
Average rents have risen 40 per cent since June 2020, according to HomeLet - after only going up by only 4.4 per cent between June 2016 and 2020.
The average gross rental yield on a newly-purchased buy-to-let in England and Wales has reached 7.2 per cent, according to estate agent, Hamptons - a record high.
The figure has surged from 6.7 per cent last year and 6.2 per cent in 2022.
The gross rental yield is the percentage of return an investor can expect to make back on the purchase price each year, before tax and other costs are taken into account.
For example, if a landlord made £10,000 in rent per year on a £200,000 property, the yield would be 5 per cent.
The rise in yields has come on the back of rental prices spiking since 2020 and house prices effectively flatlining since 2022.
'A property boom would have sounded ridiculous a couple of years ago,' says Dix, 'But it's seeming increasingly possible.'
'The sector has had everything thrown at it – fast-rising interest rates, new legislation, rumours around tax treatment – and prices are still barely below their 2022 peak.
'Importantly, in inflation-adjusted terms, prices have actually fallen by more than 15 per cent.
'As rents have risen fast, this has improved yields for investors and made investing in many areas more attractive than it has been for a long time.'
'Sentiment among the investors we speak to is also noticeably better than it has been for a long time.
'This could change quickly, and anything that dents the job market could see the situation change – but as things stand, there's potential for significant price increases in 2025.'
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