According to a leading mortgage lender, house prices are likely to rise significantly in the coming year, driven by falling interest rates that will enhance buyers’ borrowing capacity.Â
MPowered Mortgages predicts that 2025 could mark a substantial turnaround in the housing market, especially after observing a modest increase of 2.8 per cent in house prices over the year leading up to August, as reported by the Office for National Statistics.Â
This expected growth in prices could be attributed to the increasing affordability for potential buyers, who will find it easier to secure larger mortgages.Â
Additionally, landlords are poised to benefit from this market shift, as the combination of lower interest rates and rising rents may lead to increased profit margins. With more buyers entering the market and rental income on the rise, the outlook for property investment in 2025 appears promising.Â
As these trends unfold, both buyers and investors will need to stay informed about market dynamics to make the best financial decisions.
Current forecasts indicate that the Bank of England may reduce the base rate to 3.5 per cent by the end of next year, although there is considerable variation in these predictions across different financial institutions.Â
Recently, Goldman Sachs expressed its expectation for a more significant cut, projecting the base rate to fall to 2.75 per cent by the end of 2025. In contrast, Santander has offered a more cautious outlook, predicting a base rate of 3.75 per cent. These differing forecasts reflect the uncertainty in the economic landscape and the factors that could influence the Bank’s monetary policy decisions in the coming year.
Experts at MPowered Mortgages suggest that if the base rate does indeed drop to around 3.5 per cent, as some analysts predict, this could lead to substantial changes in borrowing dynamics for potential mortgage applicants. Specifically, they estimate that some borrowers might see their borrowing capacity increase by up to 18 per cent. This increase in borrowing power could open up opportunities for first-time buyers and existing homeowners looking to upgrade or relocate.
A key factor behind this potential increase is the expectation that mortgage lenders will relax their ‘stress testing’ affordability checks. Currently, these checks are designed to ensure that borrowers can manage their repayments, even in the event of interest rate rises. If the base rate continues to decline, lenders may feel more confident about easing these checks, which would further enhance the borrowing capacity for many individuals. This change could lead to a more active housing market as buyers take advantage of improved affordability.
Most lenders conduct a thorough evaluation of borrowers’ financial situations to ensure they can manage their mortgage payments in the event of rising interest rates after the initial fixed-rate period comes to an end. This assessment is crucial as it helps safeguard both the lender and the borrower from potential financial strain.
The calculation typically involves a lender’s standard variable rate (SVR) plus a predetermined percentage, which varies by institution. At present, this means that some lenders are testing whether borrowers can afford mortgage rates reaching around 8.5 per cent. This figure serves as a benchmark, reflecting the higher costs that could arise if the borrower allows their mortgage to transition to the SVR without making any adjustments.
This rigorous testing process is designed to ensure that borrowers can still meet their monthly payments, even if they experience an increase in interest rates after their initial fixed-rate deal expires. Consequently, if a borrower does not actively manage their mortgage, such as by remortgaging or switching to a different deal, they should still be in a position to handle the increased financial burden associated with the higher monthly payments. By putting these measures in place, lenders aim to promote responsible borrowing and maintain stability within the housing market.
Lender standard variable rates (SVRs) usually decrease when the Bank of England reduces the base rate, although the final decision lies with each lender.
Peter Stimson, head of product at MPowered Mortgages, notes that this situation could enable home movers and first-time buyers to borrow more. For instance, individuals currently able to borrow up to £200,000 might see that figure rise to £236,000 next year, depending on their affordability assessments.
Stimson believes this increase in borrowing capacity could positively impact house prices. He explains that lenders determine affordability based not on the current interest rate a borrower will pay, but on a hypothetical future interest rate they might face.
Lenders assess whether borrowers can manage their monthly repayments along with other necessary expenses if mortgage rates were to rise to that level. As the base rate declines, SVRs are also expected to fall, which will subsequently lower the stress rate calculations used during affordability checks.
He mentions that lenders typically stress-test at a minimum rate of around 7 per cent, which would still significantly enhance borrowing potential compared to the current stress-test rate of 8.5 per cent or higher.
House price growth is already ticking upÂ
There are early indications that house price increases are starting to pick up speed.Â
According to Nationwide’s latest house price index, which reflects mortgages issued in September, prices have risen at the fastest rate in two years.Â
While the idea of a property boom might have seemed far-fetched a couple of years ago, it now appears increasingly likely. Peter Stimson suggests that a combination of rising wages, lower mortgage stress testing, and reduced rates could lead to a significant price surge in 2025.
“Wages have increased by around 14 per cent over the past two years, as reported by the ONS, while house prices have remained relatively stable.Â
House prices are primarily influenced by mortgage affordability, and the main factors preventing growth in the past two years have been high interest rates and the stringent affordability stress tests applied by lenders.”
Buy-to-let resurgence on the cards?Â
Stimson’s view on the likelihood of rising house prices is shared by others in the industry.Â
Rob Dix, co-founder of the property advice site Property Hub and co-host of The Property Podcast, believes a house price boom could be on the horizon next year. He points out that the property market is becoming an attractive investment once more due to increasing rents.
Average rents have surged by 40 per cent since June 2020, as reported by HomeLet, following a modest increase of just 4.4 per cent between June 2016 and 2020.Â
In England and Wales, the average gross rental yield for newly purchased buy-to-let properties has reached a record high of 7.2 per cent, according to estate agent Hamptons. This figure has risen from 6.7 per cent last year and 6.2 per cent in 2022.
Gross rental yield represents the annual return an investor can expect from the purchase price, before accounting for taxes and other expenses. For instance, if a landlord earns £10,000 in rent on a property worth £200,000, the yield would be 5 per cent.
The increase in yields has been driven by the spike in rental prices since 2020, while house prices have largely remained stagnant since 2022.Â
“A property boom would have sounded absurd a couple of years ago,” Dix says, “but it now seems increasingly possible.”
“The sector has faced numerous challenges, including rapidly rising interest rates, new legislation, and changes in tax treatment, yet prices are still only slightly below their 2022 peak.Â
“Crucially, when adjusted for inflation, prices have dropped by more than 15 per cent.Â
“As rents have climbed, yields for investors have improved, making investing in many areas more appealing than it has been for some time.”
Dix also notes that investor sentiment has noticeably improved.Â
“While this could shift rapidly, especially if the job market weakens, the current outlook suggests there is potential for significant price increases in 2025.”