How the Bank of England’s Interest Rates Shape the UK Housing Market

On the 7th of August, the Bank of England reduced its base rate from 4.25% to 4%.

First things first, “what is the Bank of England Base Rate?”

The base rate is the interest rate the Bank of England (BoE) charges commercial banks when they borrow money, which is the reason the base rate is often referred to as the ‘most important interest rate in the UK’. Since banks rarely absorb higher costs themselves, any change is passed on to customers in the form of altered borrowing and savings rates; which is why changes to the BoE’s base rate are so significant, especially when we look at these changes through their impact on the housing market.

The most direct way the base rate influences housing is through mortgage rates; small changes in interest rates can add thousands of pounds to repayments every year.

Put simply, if the BoE raises the base rate, borrowing becomes more expensive and lenders increase mortgage rates. If the BoE cuts the rate, borrowing costs fall and lenders typically reduce mortgage rates. These changes are not arbitrary: the BoE’s Monetary Policy Committee adjusts the base rate to manage inflation or to support economic growth.

For example, a £200,000 mortgage over 25 years at 2% costs around £850 per month. At 6%, with the figure jumping to around £1,290 per month, the difference adds up to over £5,000 a year. For first-time buyers or households on limited budgets, such a shift can mean the difference between playing the property game or waiting on the sidelines.

This is how higher interest rates reduce affordability, while lower rates make homeownership more accessible. However, low rates can also increase competition among buyers, which in turn pushes house prices upward.

Changes to mortgage rates mean changes in buyer behaviour and market demand.

Changes in affordability translate quickly into shifts in behaviour. Higher mortgage rates deter many potential buyers, who often adopt a 'wait and see' approach. This reduces the number of transactions, slows the pace of sales, and dampens price growth.

The dynamic was evident in 2022 and 2023, when the BoE raised rates to tackle inflation. Mortgage costs jumped, leading to fewer transactions and a cooler market. By contrast, a long period of ultra-low rates between 2009 and 2015 encouraged buyers, supported sustained demand, and made sellers happy by contributing to rapid house price growth.

This raises a common question: should you buy when interest rates are high? The answer depends on personal circumstances. Higher rates usually mean less competition and more room for negotiation with sellers. However, during these times, affordability can be a serious hurdle, so buyers need to weigh whether higher repayments are sustainable in the long term.

As I am sure you have already figured out, these factors do lead do changes in how property is priced – with massive implications depending on the region.

Property values are highly sensitive to borrowing costs. In high-demand markets such as London, even small rate increases can have a noticeable cooling effect, as fewer buyers can meet sellers’ price expectations.

When the BoE rate stays low, such as during 2009 and 2015, affordability improves and demand rises, often driving prices higher. During those six years London and the South East experienced particularly strong growth as mortgage rates remained subdued.

For both investors and homeowners, this pattern highlights the importance of understanding how the BoE rate interacts with local supply and demand. By anticipating these cycles, stakeholders can make more informed decisions about when to buy, sell, or invest.

Interest rates also shape the market beyond individual buyers. Developers often rely on loans to finance construction. When borrowing costs rise, new projects may be delayed or cancelled. Similarly, landlords with buy-to-let mortgages may see repayments exceed rental income, making property investment less attractive.

The effects spill into the wider economy too. Higher mortgage costs reduce disposable income, meaning households cut back on spending elsewhere. Conversely, when mortgage rates fall and property prices rise, homeowners often feel wealthier, boosting confidence and consumer spending. This is known as the ‘wealth effect’.

This change marks the fifth reduction in 12 months and the speed of rate changes matters as much as their direction. Rapid increases in the base rate can cause sharp housing slowdowns, as buyers retreat and affordability drops too quickly for the market to adjust. Rapid decreases, on the other hand, can trigger demand surges that lead to price spikes, especially if supply is limited.

This volatility explains why the Bank of England tries to adjust rates gradually, signalling its intentions to help households and businesses adapt.

The speed of interest rate changes can be just as important as their direction. When the Bank of England raises rates too quickly, it risks shocking the housing market. Buyers may suddenly find that their mortgage offers are no longer affordable, which leads to a steep drop in demand and a slowdown in transactions. This can create a cascading effect, where sellers are forced to reduce prices, construction projects are delayed, and wider economic confidence is shaken before the market has time to rebalance.

Conversely, when rates are cut sharply, the opposite problem can occur. Cheaper borrowing costs can unleash a sudden wave of demand, particularly from first-time buyers and investors, at a time when housing supply is often constrained. This rush of activity can push prices higher very quickly, fuelling bidding wars and potentially pricing out some buyers entirely.

This is why the Bank of England typically prefers a more measured approach, adjusting rates in smaller increments and signalling its intentions well in advance. Gradual changes give households time to re-evaluate their finances, businesses time to adjust their plans, and the market as a whole time to respond in a more orderly way. In doing so, the Bank aims to avoid unnecessary volatility and maintain stability across the wider economy.