Today’s announcement by the Bank of England that interest rates will rise from 0.25 to 0.5% has not come as a surprise, but marks a significant change in direction following almost a decade of record low interest rates.
First Time Buyers who have purchased a property in the past 10 years have become accustomed to stable, low interest rates and now need to prepare for the possibility of increased fluctuation in rates over the coming years. The announcement will also have an impact for a large number of tenants, as Buy To Let landlords re-assess their financial models and account for the possibility of further increases in the coming years. With many tenants already dangerously close to affordability limits, this could have a significant and damaging effect on the sector.
Nick Marr, Co-founder of property marketplace TheHouseShop.com stated “Today’s interest rates rise announcement may not seem like a substantial increase, but it is highly likely that this will be followed by further increases over the coming years as the Bank of England puts an end to the almost decade of record low rates. Many homeowners, especially First Time Buyers who have purchased properties during this period, will need to re-asses their mortgage repayment budgets and make plans on how they would cut costs should rates rise even further over the coming months and years.”
“It is not just homeowners that will be affected by the new increased rates. The boom in the Buy To Let market over the past 5-10 years has meant that a large number of tenants in the private rental sector could also be affected by the rates rise. Buy To Let landlords plan their budgets and set rents according, in large part, to their mortgage repayments, and the new higher interest rates will be yet another blow for landlords’ profits and tenants’ affordability. Many UK landlords are already planning to raise rents following the Section 24 tax changes and proposed ban on letting fees to tenants, and this new announcement could push even more landlords to consider rent rises.”
“Our recent YouGov research showed that many tenants are already dangerously close to affordability limits, with 1 in 4 private renters spending more than half their monthly income on housing costs. Should we see a more significant rates rise in the next few years, we could see a substantial increase in the number of tenants struggling to keep up with rent payments.”
“While the new rates rise should not cause immediate alarm for mortgage holders, it should prompt anyone with a stake in the housing market to re-assess their investments and plan ahead to take account of the new direction of travel that the Bank of England has signalled with this announcement.”
Paresh Raja (CEO of leading bridging specialist MFS) reacting to the news and what it will mean for UK property and investors told us…
“In light of rising inflation and stagnating economic growth, today’s decision to increase interest rates for the first time in a decade comes as no surprise. Nevertheless, it is important to note that the rise in interest rates will place an added financial pressure on first-time buyers and buy-to-let investors needing to borrow money. While the impact on the UK property market may not be immediately obvious, there is no question that this month’s upcoming Autumn Budget now takes on greater significance as it must find ways of alleviating stress and providing support for property buyers. With the interest rate now sitting at 0.5%, this is a prime opportunity for the Government to address issues like real estate demand and Stamp Duty to ensure the market remains buoyant and readily accessible for homebuyers and investors alike.”
Frazer Fearnhead, CEO of the property crowdfunding company ‘The House Crowd’ said today “I sincerely hope all the banks will have given as much thought and effort to increasing interest rates for investors today as they will have given to helping people maintain their mortgage repayments and loan agreements”. He added “For the past decade investors have been forgotten and suffered derisory levels of returns on their savings. So, it is crucial that banks, increase interest rates on savings just as quickly as they increase interest charges to borrowers”.
Putting the rate increase in context
Ray Withers, CEO of Property Froniers is more optimistic “It is true that this is the first time that the base interest rate has been lifted in a decade – that is certainly a subject worth talking about. However, to put things into perspective, the rate is only returning to 0.5% – the same level it has been at for nearly a decade, from the 2009 financial crisis, right up to the Brexit referendum.”
Prior to the financial crisis, interest rates were above 5%, having risen steadily since 2003, and this did little to slow the growth of house prices during that bonanza. The BoE has indicated that future rate rises will be extremely gradual, perhaps another 0.25% in a year’s time, and another a year after that.
Across the pond, interest rates have been rising at a similarly glacial pace, and the end of quantitative easing at the European Central Bank is expected to have similar consequences. Today’s hike in the base rate is not a circumstance peculiar to Britain – it is part of a very gradual shift in the world economy as it emerges from the lingering effects of the financial crisis.
The drivers of that shift are all positive for house prices in the long term, outweighing the effects of marginally more expensive mortgages in the short term.
The effect on households and homebuyers
Two numbers are often quoted as the causes of the rate rise. The first is that GDP grew by 0.4% in the last quarter – above expectations and suggesting to some commentators that the original cut (in anticipation of a referendum-induced slowdown that has not materialised) was unnecessary in the first place. This bodes well for the employment market.
The second is that inflation now sits at 3%, above the BoE’s 2% target, which in theory means the economy is overheating and needs to be tempered. Raising interest rates does this by making saving slightly more attractive than it was before, in comparison with spending.
The slightly higher cost of debt, then, is offset by higher interest rates on savings, tipping the balance in favour of thriftier households. But savings accounts will still be offering no more than 1.5% – nowhere near the returns available to investors in the rental market. Overall, monetary policy still overwhelmingly favours borrowers – including mortgage borrowers – over savers.
About 60% of mortgages are on fixed rates, avoiding any effect whatsoever for the remainder of the fixed term, while the other 40% may be modestly affected. On a typical £150,000 loan, investors will be exposed to around £15 per month of extra mortgage costs – hardly enough to discourage purchases and a relatively insignificant dent to investor yields.
Outlook on the property market
Moody’s credit rating agency reacted that: “house price growth and the market’s overall stability have been incredibly resilient despite the EU vote and a snap general election. A few quid added to the average mortgage repayment will not deter this growth in the medium to long term.”
Indeed, the 0.25% rate rise is a small incremental change. It was expected, and is furthermore necessary for the wider economy, which is a much more significant driver of the housing market overall.
Mortgage costs now rising a shade above historic lows will do little to dent the UK’s fundamentals, which still exhibit robust demand – particularly given the circumstances – and extremely limited supply. Especially in regional towns beyond the mainstream with high yields and no danger of oversupply, such as Halifax and Doncaster, excellent returns and solid growth potential will remain for the foreseeable future.
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Daniel Peacock