Landlords and the Next Interest Rate Decision

On August 4 the Bank of England’s Monetary Policy Committee voted to raise the base rate from 1.25 to 1.75 per cent - the sixth consecutive rise in a row and reflected efforts to curb the rising inflation. 

On September 15 the MPC will meet again. With inflation rising to 10.1 per cent in mid-August and Goldman Sachs predicting inflation could hit 22.4 per cent next year it is anticipated that the BoE will need to move more aggressively in raising interest rates.  

Some economists currently expect the BOE key rate to hit 4.25 per cent per cent next year, up from 1.75 per cent currently.  

Looking at the bigger picture

Looking firstly at the bigger picture, and with so many landlords currently having fixed mortgages, it will take time for the effects of these rises to be felt and these landlords will be breathing a sigh of relief for now.  For example, those who fixed last year for five years won’t feel the effect on their mortgage for many years. 

Inflation may have some benefits to landlords such as a higher demand from tenants from those delaying a purchase.  Inflation may cause rising average property prices which could mean higher future property values however there are plenty of experts who believe property values may fall.  Those landlords with a mortgage could see inflation shrink the real value of their buy to let loans.  

Some downsides of inflation may be an increased chance of tenants unable to pay rent if utility and household bills continue to increase.  Many landlords will feel a responsibility to help tenants mitigate the cost of living crisis and some landlords may temporarily freeze rents.  The maintenance cost to upkeep the property may increase and many landlords may have to spend money making energy efficient upgrades.

BoE base rate increases will affect mortgage rates.  

The average buy to let fixed rate towards the end of August was around 4.03 per cent for a two year fixed rate and 4.19 per cent for a five year fixed rate and changing/increasing quickly.  

The impact of the new mortgage rates and prospect of more increases may make investors think twice especially if they are relaying on a high LTV buy to let mortgage. This is partly because of the change to buy-to-let tax relief which have already taken full effect.

For most landlords, property investment is a long term strategy and rates will fluctuate over the term of the mortgage.

With these challenging economic conditions, it is important for landlords to be more prepared than ever. 

Act quickly ahead of your fixed-term end

For those landlords with fixed rate-mortgages coming up for renewal in the next 6-9 months, it’s important to act quickly. While the new rate is likely to be higher than your current product, we anticipate further increases to follow in the Autumn. 

Talk to an independent mortgage broker to gain an objective view of the current products available.

Check the rate you are paying now and the penalties you may incur for repaying your current fixed mortgage early.  Speak to an independent broker to calculate if it is worth considering ‘paying now’ to potentially save in the future.  It is predicted mortgage rates will continue to increase hence securing a rate now, ahead of potential further increases can give you assurances over the next 2-3-5-7-10 years for example.  

Factor in your plans if you’re looking at long-term fixed rate products

While longer term fixed-rate mortgages currently appear attractive, it’s important to consider whether you will want to pay off your mortgage during the fixed rate period.  If that’s the case, then you may face sizeable early repayment charges. Do think about how long you may have the mortgage in place for.

Consider overpaying into your mortgage

If you have the funds available and are on cheaper rates, you may want to consider overpaying into your mortgage.  Not only will this reduce the pot to which interest is applied, the current rate is most likely going to be cheaper than the rate you are likely move onto in the future. This will help you get used to paying more when it comes to you refinancing your lower mortgage balance.  In some scenarios this may help with the Loan To Value bracket when your existing rate ends and you re-finance or switch the rate. 

In many cases policyholders can pay up to 10% a year without incurring early repayment penalties in their mortgage during the fixed rate period. Do however check the early repayment clauses of your policy and speak with a specialist to get advice specific to your circumstances.  Speak with your accountant about the pro’s and con’s of overpaying into your mortgage.   

Notable impact on buy to let mortgage stress test

When applying for a buy to let mortgage lenders will usually apply a stress test factoring in your ability to pay a higher interest rate in the future. The stress income cover ratio is the calculation lenders apply to determine your affordability of a buy to let mortgage.  With higher interest rate/mortgage rates comes higher rates of stress testing on the interest you will pay on your mortgage and this can have an impact on your mortgage capacity.  Speak to an independent mortgage broker to discuss how much you can borrow as you may not be able to borrow as much as you did last time. 

Summary

As we come to the end of summer, there is a slowing down in the property market in some areas. With the current cost of living, the interest rate rises and the expense of selling or buying property, many people are rethinking their plans.  Looking ahead, it will be important for landlords to carefully budget for their short and longer-term property costs. 

* Adrian Anderson is director of property finance company Anderson Harris *

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