After a long time languishing at a record low of 0.5%, and after talk of an increase was cut off by the Brexit vote, the Bank of England base rate has been cut further to just 0.25%. This measure is designed to stimulate the economy, but many are understandably unclear about what exactly the cut means for the property market.
There are several ways in which the lower interest rate may make a difference to the property market. Some of the most direct and important areas of influence include:
Possible Better Mortgage Deals
There is a possibility of better mortgage deals being made available, as lower base rates are always a key factor in the availability of affordable credit. This is something the Bank of England actively wants to encourage, and the availability of the £100 billion Term Funding Scheme (TFS) is a key example of how the Bank is pushing for lenders to pass on savings after the base rate cut.
However, the prospect of mortgage deals getting more affordable at this juncture is only a possibility, and the difference may not be big. The base rate is not the only factor at play. High levels of competition between lenders, in combination with the fact the base rate was already at a historic low before the cuts, have led to a situation where many mortgage deals are already as affordable as lenders have been able to make them. Even with the base rate still lower, there may only be little or no room for movement.
Variable Rate Mortgages may get Cheaper
Those who already have mortgages and are on variable rates will likely see their deal become more affordable. The very nature of a variable rate mortgage is that it tracks the Bank of England base rate, so a drop in the base rate directly translates to lower repayments. This is good news for homeowners, who will save money on each repayment. With yields on buy-to-let remaining unmoved but repayments dropping, landlords with buy-to-let mortgages on rental properties will effectively see their profits grow.
This is a rather firmer prospect than the chance of increased affordability of new mortgage deals. It is still not set in stone, however, as some lenders may dig into their terms and conditions and produce get-out clauses to keep themselves from cutting already-low rates even further.
More Activity
The property market may well see an increase in activity as a result, direct and indirect, of the latest base rate cut. This is likely to come from all kinds of buyers; owner-occupiers, individual landlords, investment funds, and international investors.
The reasons for the expected boost in activity from the base rate cut are several. If mortgage deals do become more affordable, even modestly, this is likely to have some influence on buyers across the board encouraging them to buy while they still have this access to affordable credit. A weaker sterling is also likely to encourage foreign investors to buy while exchange rates work in their favour and British properties are effectively cut price – as indeed some such investors have already done in the aftermath of the Brexit vote.
Author Bio
Hopwood House are property investment specialists, with a large portfolio of UK property investments in the buy-to-let and student property markets.
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Daniel Peacock