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

MPowered Mortgages predicts 2025 could see a big change in house prices, which rose by a modest 2.8% 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, meaning their profits could be set to rise.

Markets currently forecast the Bank of England to cut its base rate to 3.5% by the end of next year, although forecasts vary.

Boom time? Homebuyers may find they can borrow more as the prime rate falls next year, according to Peter Stimson (inset right), head of product at MPowered Mortgages

This week, investment bank Goldman Sachs said it expected the key rate to be cut to 2.75% by the end of next year, while Santander gave a more reserved forecast of 3.75%.

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

That’s because sustained prime rate cuts should prompt mortgage lenders to relax the affordability checks they “stress test” borrowers are subject to.

Most lenders look at borrowers’ finances and assess whether they can still afford the payments if the interest rate has increased with the initial fixed rate deal.

The calculation is usually based on the lender’s standard variable rate (SVR) plus a certain percentage. Right now, it means some lenders are testing that borrowers could afford a mortgage rate of around 8.5 percent.

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

Less stress: MPowered Mortgages’ Peter Stimson says lenders’ affordability checks could become more lenient

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

Peter Stimson, head of product at MPowered Mortgages, says this will mean home movers and first-time buyers will be able to borrow more.

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

This, according to Stimson, could be a shot in the arm for home prices.

Stimson says, “Lenders base their affordability not on the interest rate the borrower will pay on their mortgage, but on an interest rate they ‘could’ pay in the future.

“They will check whether the borrower could still afford the monthly repayments, plus all other necessary budget outlays, if mortgage rates were to rise to that amount.

“As the base rate goes down, so will the SVRs and therefore the stress rate calculation with it.”

He says the minimum rate lenders tend to stress test is around 7%, although that could still make a substantial difference to lending power, compared to today’s 8.5% or more.

Home price growth is already on the rise

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

The latest national home price index, which reflects mortgage lending in September, shows that home prices rose at the fastest pace in two years.

Stimson says a combination of rising wages, lower mortgage stress tests and low rates could see prices take off in 2025.

“Wages have risen by around 14% over the past two years, according to the ONS, while house prices have changed little.

“Home prices are very much a function of mortgage affordability and what has kept them from rising over the past couple of years is a combination of high interest rates and mortgage affordability stress calculations.”

Buy-to-let resurgence on the cards?

Stimson isn’t the only one who thinks home prices seem to be on the rise.

Rob Dix, co-founder of property advice website Property Hub and co-host of The Property Podcast, also believes a rise in house prices is possible next year.

Attractive outlook: Rob Dix says 2025 could be a good year for owner returns

He says property is starting to look like an attractive investment again thanks to rising rents.

Average rents have risen by 40% since June 2020, according to HomeLet – after rising by just 4.4% between June 2016 and 2020.

The average gross rental yield for a new buy-to-let in England and Wales reached 7.2%, according to estate agent Hamptons – a record high.

The figure is up from 6.7% last year and 6.2% in 2022.

The gross rental yield is the percentage return an investor can expect to recoup on the purchase price each year, before taxes and other costs are taken into account.

For example, if a landlord rented out £10,000 a year on a £200,000 property, the yield would be 5%.

The rise in yields was due to rising rental prices from 2020 and house prices actually falling from 2022.

“A housing boom would have sounded ridiculous a few years ago,” says Dix, “but it’s looking more and more possible.”

“The sector has had all the problems – rapidly rising interest rates, new legislation, rumors of tax treatment – ​​and prices are still barely below the 2022 peak.

“Importantly, in inflation-adjusted terms, prices actually fell by more than 15%.

“As rents have risen rapidly, this has improved returns for investors and made investment in many areas more attractive than they have been for a long time.”

“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 affecting the labor market could see that change – but as it stands, there is the potential for significant price increases in 2025.”