Mortgage costs have been on the rise as interest rates have been pushed up, but it seems the current environment is likely to be a “blip”.

The Bank of England base Rate has been on the rise in recent months, reaching its current level of 4.25% last month in response to climbing inflation levels. This has pushed up the cost of borrowing, with many mortgage holders and new buyers finding the rates much higher than they were a year ago.

On the flip side, many banks have also responded by increasing their savings rates, benefitting those with Cash in the bank and other investments.

Now, the International Monetary Fund (IMF) has revealed that it believes the current higher interest rates “are likely to be temporary”, which is likely to be welcome news for anyone who might be set to remortgage or take out new borrowing in the future.

It says that once the current high levels of inflation are brought under control, which is affecting all the world’s major economies – not just the UK – it believes interest rates could even return to pre-pandemic levels.

It isn’t certain when this could happen, as inflation is currently being impacted by events such as the war in Ukraine pushing up energy costs. Therefore, while the relief for mortgage holders may not be immediate, it is likely to restore more faith in the UK’s housing market going forwards as borrowing affordability improves.

Factors affecting interest rates

In its blog, the IMF wrote: “When inflation is brought back under control, advanced economies’ central banks are likely to ease monetary policy and bring real interest rates back towards pre-pandemic levels.”

If interest rates do fall, this is likely to relieve pressure on the government, as it will then be able to borrow at cheaper rates. The UK’s current target for inflation is 2%, so it must fall around 2% from its current level to reach this goal.

Other factors that are expected to influence interest rate falls are the country’s ageing population, as well as relatively low productivity levels, according to a forecast.

The number of working age adults in the UK, according to comments from Bank of England governor Andrew Bailey, has fallen to less than 65% – based on the number of people who are aged between 20 and 59 years old. This could have a knock-on effect to productivity over time, as birth rates are lower and people live for longer.

Buying with cash or a mortgage?

There has been an increase in the number of people – including landlords and property investors – eschewing  borrowing and buying with cash instead. Some are cashing in on the gains they have made through their long-term investments, and reinvesting the money in property.

Mortgage rates for buy-to-let borrowing have increased at a similar rate to standard mortgages, and research from Hamptons recently found that 59% of buy-to-let purchases made through the company so far in 2023 were made with cash rather.

By comparison, in 2022, the company found that 53% of buy-to-let investors were mortgage-free.

During times when rates are higher, the more expensive parts of the country can become even less affordable. Buyers may struggle to pass lenders’ stress tests for mortgages on more pricey properties, so buyers who can afford it may be more likely to turn to cash.

Many parts of the north of England, where properties are cheaper, may see fewer cash buyers than mortgaged ones, because the costs are more affordable as less borrowing is generally needed.

Hamptons commented: “Given that these properties are often located in the most expensive parts of the country, previously, when rates were lower, investors would use a mortgage to bridge the gap between their savings and the purchase price.

“But at today’s rates, it’s harder for investors to pass a lenders’ stress test meaning more are having to rely on cash to fund their purchase.”