Beyond the Headlines: making sense of the BOE's base rate decision

In the latest update this week from the Bank of England, the base rate remains steady at 5.25%. This decision marks a continuation of the recent trend, and while it may raise some eyebrows, especially for those new to the property market, this post is here to guide you through it.

Since the financial crisis of 2008, interest rates have held at historically low levels, well below the long-term average of the Base Rate, which is 5%. The decision to maintain the rate at 5.25% signals a positive step towards financial stability. But it also indicates that rates around 5% are going to be our new normal as we revert back to being near the average.

Here's the silver lining: while higher interest rates can impact affordability, they can also contribute to a more balanced and sustainable property market. With higher interest rates, inflation in house prices may level out, potentially making homes more affordable in real terms. Moreover, if you continue to focus on improving your income, this could further improve your affordability factor even further.

So, let's dive into the practical steps you can take to ensure success in applying for a mortgage despite the tighter affordability tests:

Take the time to thoroughly evaluate your finances. Look at your current situation and produce a snapshot of what it looks like now. Then, considering all your expenses, including potential mortgage payments at the current interest rates, create a forecast budget, of what your spending plan might be after you've moved in to your dream first home. This will provide you with a clear picture of what you can comfortably afford.

A larger deposit can be your greatest ally. Not only does it reduce the amount you need to borrow, but it can also improve the terms of your mortgage. So, focus on saving for a substantial deposit before you embark on your home buying journey. Don't stop saving when you reach a deposit of 5%, keep going. There are better deals to be done if you manage to save up a 15% deposit.

A robust credit score is paramount when applying for a mortgage. Pay bills on time, reduce existing debt, and make sure there are no discrepancies on your credit report. A healthy credit score is a powerful asset. This will help you borrow up to a better income multiple.

Higher interest rates could also mean your existing debt costs are rising too. Prioritise paying down high-interest debts to ensure you're in the best financial position when applying for a mortgage. This proactive approach not only improves your overall financial health but also demonstrates responsible financial management to lenders.

Don't hesitate to seek advice from a mortgage advisor or broker. Their expertise can be invaluable in helping you find the best mortgage deals tailored to your specific financial situation.

In conclusion, while the current interest rate landscape may seem like uncharted territory, it's important to remember that you have the knowledge and tools to navigate it successfully. By being proactive and approaching the process like a seasoned pro, you can secure a mortgage that sets you on the path to fulfilling your home ownership dreams.

Empowering you with knowledge, one financial step at a time. What steps will you be taking to maximise how much you can borrow?