Rising Interest Rates and the UK Housing Market: Who Is Most at Risk?

First‑Time Buyers

Rising interest rates have sharply reduced options for first‑time buyers. Lenders such as Santander and HSBC have withdrawn new-borrower deals, cutting the number of available mortgage products by 40 per cent. This is especially damaging for buyers with small deposits. Moneyfacts reports that only 199 mortgage products are available for buyers with a 5 per cent deposit, compared to 347 last year.

Lenders are increasingly cautious about granting mortgages to buyers with limited capital. Higher rates increase the risk of negative equity, making first‑time buyers a more vulnerable group. As a result, long‑term mortgages are becoming more common. 35-year or even 40-year loans are replacing the traditional 25-year term. In March, 19 per cent of first‑time buyer loans were for 35 years or longer.

With the average first‑time buyer now aged 32, many will spend most of their working lives repaying their mortgage. Short‑term affordability is being prioritised over long‑term financial stability.

Government figures, including Michael Gove, have also suggested that the UK should adopt 25‑year fixed‑rate mortgages similar to those in the United States. While this would protect buyers from fluctuating rates, it would lock them into today's high rates for decades and restrict their ability to re‑mortgage without incurring early repayment charges.

Impact on Future Buyers: The Rental Market

Rising interest rates are also affecting those who are not yet ready to buy. Landlords face refinancing losses, with around 225,000 expected to be affected. Many are selling their properties or increasing rent. Buy‑to‑let mortgage rates have risen sharply, with NatWest increasing rates from 6.21 per cent to 6.3 per cent in three days.

Zoopla estimates rent is now 10.4 per cent higher than last year, the highest level in a decade. Higher rent reduces future buyers' ability to save for deposits, meaning the number of first‑time buyers is likely to fall over the coming years.

Existing Homeowners

Homeowners re‑mortgaging their properties are also facing significant challenges. Two- and five-year fixed-rate mortgages at around 6 per cent are becoming common. Many homeowners hope rates will fall before their next re‑mortgage, but this strategy reduces disposable income. The Institute for Fiscal Studies estimates that 1.4 million mortgage holders will face a 20 per cent reduction in disposable income. Public First consultancy suggests some households will pay more than £5,000 extra due to rate rises.

Despite this, widespread repossessions are unlikely. The stability of the past decade has increased equity levels, and tighter lending conditions since 2008 have reduced risk.

However, homeowners still face falling property values. Nationwide reports that average house prices are down 3.8 per cent from last year. Zoopla found that 42 per cent of sellers in June accepted a 5 per cent reduction in asking price, the highest level since 2018. This increases the risk of negative equity and demonstrates that rising rates affect all levels of the property ladder.

Impact on Law Firms

Rising interest rates will create several shifts across legal practice areas:

Real Estate

A downturn in mortgage approvals will reduce transactional work. However, lawyers may see increased demand for advice on refinancing, mortgage disputes and distressed sales.

Insolvency and Restructuring

High rates may push businesses and individuals into financial difficulty, increasing insolvency‑related instructions, particularly for commercial property owners.

Mergers and Acquisitions

High borrowing costs reduce appetite for debt‑financed deals, meaning M&A activity may continue to slow.

Banking and Finance

New clauses, covenants and agreements will need updating to reflect rate volatility, creating opportunities for specialist lawyers.

Conclusion

Rising interest rates present serious challenges for buyers, homeowners and the wider housing market. However, recent stress tests show UK lenders can withstand rates of per cent. If rates continue to rise, the market will be stretched, but a collapse appears unlikely.