Home prices will rise in 2025 as buyers can get bigger mortgages

House prices could rise significantly next year as buyers’ borrowing power gets a boost from falling interest rates, according to a mortgage lender.

MPowered Mortgages predicts that there could be a major turnaround in house prices in 2025, which rose a modest 2.8 percent in the year to August, according to the latest figures from the Office for National Statistics.

Landlords would also benefit from the combination of lower interest rates and higher rents, which could increase their profits.

Markets are currently predicting that the Bank of England will cut the base rate to 3.5 percent by the end of next year, although forecasts vary.

This week, investment bank Goldman Sachs said it expects the base rate to be cut to 2.75 percent by the end of next year, while Santander made a more reserved forecast of 3.75 percent.

Experts at MPowered Mortgages believe that if the base rate falls to 3.5 percent next year – as some analysts predict – some mortgage borrowers could borrow up to 18 percent more.

This is because continued reductions in base rates should lead mortgage providers to relax the affordability ‘stress tests’ they subject borrowers to.

Most lenders look at borrowers’ finances and assess whether they can still afford their payments if interest rates rise once their original fixed rate agreement expires.

The calculation is usually based on the lender’s standard variable interest rate (SVR) plus a certain percentage. Currently, this means that some lenders are testing whether borrowers can afford a mortgage interest rate of around 8.5 percent.

This means that after the initial fixed period, if the borrower does nothing and falls due on the lender’s SVR, they should be able to pay the higher monthly costs.

Lenders’ standard variable interest rates tend to fall when the Bank of England reduces the base rate, although this is at the discretion of each lender.

Peter Stimson, head of product at MPowered Mortgages, says this means movers and first-time buyers can borrow more.

Some people who can currently borrow up to £200,000 could see that increase to £236,000 next year, subject to affordability checks.

According to Stimson, this could be a shot in the arm for house prices.

Stimson says: ‘Lenders do not base their affordability on the interest the borrower will pay on their mortgage, but on the interest they ‘can’ pay in the future.

‘They will check whether the borrower can still pay their monthly repayments, plus any other necessary budgeted expenses, if mortgage interest rates were to rise to this amount.

“As base rates fall, so will SVRs, and with them the stress rate calculation.”

He says the minimum lender interest rate under the stress test is around 7 percent, although this could still make a substantial difference to borrowing power compared to the current 8.5 percent or more.

House price growth is already rising

There are already signs that house price increases are starting to accelerate.

Nationwide’s latest house price index, which reflects mortgages granted in September, shows house prices have risen at the fastest pace in two years.

Stimson says a combination of rising wages, lower mortgage stress tests and reduced interest rates could see prices rise in 2025.

‘According to the ONS, wages have risen by around 14 per cent in the past two years, while house prices have changed little.

‘Housing prices are largely a function of mortgage affordability and what has held them back over the past two years is a combination of high interest rates and lenders’ stress test calculations.’

Buy-to-let revival on the horizon?

Stimson isn’t the only one who thinks house prices are 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 rise may be on the horizon next year.

He says that thanks to rising rents, real estate is starting to look like an attractive investment again.

According to HomeLet, average rents have increased by 40 percent since June 2020, after rising by only 4.4 percent between June 2016 and 2020.

According to estate agent Hamptons, the average gross rental yield on a newly purchased buy-to-let in England and Wales is 7.2 per cent – ​​a record high.

The figure has increased from 6.7 percent last year and 6.2 percent in 2022.

The gross rental yield is the percentage return that an investor can expect to earn back annually on the purchase price, before deduction of taxes and other costs.

For example, if a landlord earned $10,000 in rent per year on a $200,000 house, the return would be 5 percent.

The increase in yields is the result of the increase in rental prices since 2020 and the fact that house prices have actually leveled off since 2022.

“A real estate boom would have sounded ridiculous a few years ago,” says Dix, “but it seems increasingly possible.”

“The sector has been through a lot – rapidly rising interest rates, new legislation, talk of tax treatment – ​​and prices are still barely below their 2022 peak.

‘Importantly, prices, adjusted for inflation, have actually fallen by more than 15 percent.

‘As rental prices have risen rapidly, this has improved returns for investors and made investment in many areas more attractive than it has been for a long time.’

‘The 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 labor market could see the situation change – but as things stand now, there is potential for significant price increases in 2025.’