The Intermediary –- June 2026 - Flipbook - Page 24
RESIDENTIAL
Opinion
Interest rates shape
human behaviour
F
or all the discussion
around interest rates
being ‘just a number’,
the reality is that they
remain a powerful
behavioural force.
They shape confidence, urgency,
affordability, risk appetite and
ultimately value. They influence
not only what people can borrow,
but whether they feel emotionally
comfortable borrowing at all.
Their impact across markets can
vary tremendously, and in segments
such as London flats, remortgaging
and later life lending, that influence is
becoming increasingly visible.
The psychology of borrowing is
becoming almost as important as the
mathematics of borrowing. For both
valuers and lenders, that directly
impacts on valuation certainty, and
lender risk on both back book and
current mortgage portfolios.
During the ultra-low interest rate
era, consumers became conditioned to
cheap money, fundamentally altering
perceptions of affordability and value.
The reversal of that dynamic has been
painful for many homeowners.
The current economic context
makes a swi return to that era highly
unlikely. The Bank of England’s
Monetary Policy Commiee (MPC)
has explicitly noted that current
financial conditions will need to
remain restrictive for an extended
period. The prospect of significant
near-term rate relief appears
increasingly remote.
Local trends
In London’s market for flats, the
consequences are particularly acute.
Many flat owners are discovering that
the value they believed existed five or
10 years ago is not achievable in today’s
environment.
Estate agents continue to list
properties at aspirational pricing
levels anchored to a different
interest rate world, while buyers are
22
The Intermediary | June 2026
operating with dramatically reduced
affordability. Much of this is being
driven by landlords exiting the market
and the systemic issues facing many
blocks following the Grenfell tragedy,
but affordability for both buyers and
landlords remains a fundamental
constraint.
This is especially difficult for flats,
because the market is already carrying
structural concerns around service
charges, cladding, leasehold reform
uncertainty, insurance costs and
questions over future resale liquidity.
Higher interest rates have amplified
many of the existing weaknesses
within the sector. In parts of the flat
market, owners’ expectations are
still influenced by earlier views of
value, while buyers are constrained by
today’s mortgage market. Many flat
owners who might previously have
moved are instead staying put, because
the financial jump required to move
home no longer feels rational.
That is compounded by the fact
that we are in the first period since
2013 without a scaled, national equity
loan scheme supporting new-build
demand. While the Government has
made the Mortgage Guarantee Scheme
permanent, its impact on markets like
new-build is limited.
Hard adjustment
Refinancing pressures are creating
another layer of strain across the
market. A significant number of
borrowers are now approaching the
end of fixed-rate periods secured
before or around the 2022 Liz
Truss-related volatility. For many
households, the adjustment is stark.
A borrower moving from a sub2% mortgage onto a rate closer to
5% is not experiencing a marginal
increase in costs. In some cases,
monthly repayments are increasing
by hundreds or even thousands of
pounds. That changes behaviour
immediately. Discretionary spending
falls, moving home becomes less
STEVE GOODALL
is chief executive at e.surv
aractive and household risk
tolerance declines.
Higher interest rates have
materially altered the aractiveness
of later life lending products.
Compounding interest becomes
far more significant in a higherrate environment, particularly for
borrowers concerned about preserving
inheritance value.
Institutional funders and capital
markets participants are also
reassessing risk and return dynamics.
The bond markets are sending a
clear signal about long-term rate
expectations. In May 2026, UK 10-year
gilt yields breached 5.1%, driven by
sticky inflation and stretched public
finances. When Government bonds
begin offering stronger yields, the
appetite to deploy capital into certain
forms of property or long-duration
lending can weaken.
If investors can achieve aractive
returns from lower-risk bond
markets, they may require greater
returns from equity release, specialist
lending or real estate-backed products
to justify the additional complexity
and risk. That repricing flows directly
through to consumers.
The broader issue is that property
values are never isolated from the
cost of money. Cheap debt supports
higher valuations because buyers
can service larger loans. Logically,
expensive debt compresses valuations
because affordability contracts. That
relationship feels obvious in theory,
but emotionally, markets are slower to
accept it in practice.
Interest rates do not just shape
markets, they also shape the human
behaviour within them. In today’s
market, borrower and seller behaviour
may prove to be the most important
variable of all. ●
