How does the Bank of England Base Rate Increase Affect Me as a Landlord?
By Sarah Thompson Cook, Managing Director, Mortgage Scout
Changes to interest rates
In a bid to bring inflation down, the Bank of England has implemented unprecedented increases in the base rate during the last 15 months. Unfortunately, yesterday’s base rate increase of 0.5% means for some another increase in their mortgage cost. It’s one of the reasons why we feel it’s essential to review the mortgages that you hold on your investment properties on a regular basis.
Over the last 15 months, interest rates have seen a staggering nine changes from 0.1% in December 2021 to 4% in February 2023.
For property investors on tracker, discount or standard variable rates, mortgage rates are likely to increase relatively quickly after the Bank of England announcement.
How will the interest rate increase affect you?
Over the last year, property prices have risen around 8%, which is great news for existing and landlords, but what isn’t so good is that the cost of servicing a mortgage has also risen.
For those planning to buy a first investment property, the rise in interest rates added to these house price rises equates to higher mortgage costs.
If you have a mortgage (or other loans) that charges interest at a variable rate, your repayments are likely to increase. As an example of what you can expect, if you have a 25-year mortgage of £125,000 at an interest rate of 2.5%, your monthly repayments would be £560. However, with yesterday’s interest rate rise of 0.5%, your monthly repayment would increase by £32 to £592.
Foreseeing how interest rate changes may affect your ability to make your repayments is essential.
Changes in interest rates can also affect repayments on loans such as car loans, personal loans, and credit cards, so be sure to consider these in your budgeting as well.
Does the interest rate increase affect my mortgage if it’s fixed?
If you currently have a fixed mortgage, you will not experience any immediate changes. Still, your loan will revert to a variable rate once the fixed term ends, and you will have to decide whether to re-fix your loan or remain on a variable rate and whether to do so before any further interest rate rises.
Some borrowers with only a short time left of their fixed period may opt to pay the penalty to remortgage before the end of the term and lock in another fixed term rate before they climb any higher. If your fixed term is nearing its end, it would be prudent to consult a mortgage broker to discuss your options.
Even if you are on a fixed-rate mortgage now and it doesn’t end until next year or even later, it is still incredibly important to check in with a mortgage broker sooner rather than later to understand how much a mortgage might be after the fixed rate ends. This would allow you to prepare and budget ahead of time for paying more – if needed.
Will interest rates continue to rise?
The short answer is yes; further interest rate rises are virtually inevitable to bring the rate of inflation down and protect the economy. The big question is, how much must they rise to regain balance?
Although borrowing rates are continuing to rise, this is not the highest we have seen in our lifetimes. People who are hoping to buy should not wait for rates to drop or the housing market to dip; if you have found a property, you can and should secure a rate today, as we predict further rate increases this year. Waiting around could lead to disappointment – be it a higher rate of borrowing or losing a great investment to another buyer willing to act quicker.
Expert analysts at Capital Economics believe the Bank of England base rate increases are close to their peak, but there will be a further increase of up to 0.5% this year. In addition, the lingering domestic inflation pressures mean the Bank will keep interest rates at their peak for the rest of this year.
Further fall in rates?
It’s unlikely there will be a fall in fixed rates over the coming 12 months.
So for anyone on a fixed-rate mortgage now or looking to buy a property, it’s worth keeping in touch with a mortgage broker that monitors all mortgage deals so they can help you secure the best one for your circumstances.
In addition, it’s worth knowing that your credit rating can also make a difference to the products available to you. For example, if you didn’t have a great credit rating when you took out your mortgage, and that’s now improved, you may be able to switch to a product with a lower interest rate.
What should I do if the interest rate increases and I’m looking to buy an investment property in the near future?
It is important to remind anyone looking to buy a property in the near future that you should research and secure a mortgage as quickly as possible. We are seeing lenders changing rates, criteria and affordability. When interest rates change, it always creates a flurry of new applications, leading to a backlog that can take weeks to clear.
There are options to consider if you are looking to buy soon to tackle the mortgage rate increase
A higher deposit
If you can raise a deposit of 15% or more, this can help give you access to more cost-effective mortgages that attract lower rates. Best rates tend to be when you have a 60% Loan to Value, and that would be very tough as a first-time buyer or second stepper, but the higher deposit you can raise, typically the better rates you can achieve and the cheaper your mortgage will be.
Extend the mortgage term
Typically a mortgage term is 25 years but this isn’t the maximum available: is definitely worth chatting through with a broker to see how much taking out a 30 or 35-year mortgage could save in the short term. Some lenders are now even offering 50-year mortgages. But, of course, it doesn’t mean it will take you that long to pay off the mortgage; it just means it will help lower the monthly costs now when you most need it, although you will pay more back in interest in the longer term.
Why it’s worth contacting a broker to review your mortgage
It is possible to go direct to lenders to find out about their latest products. However, with so many factors influencing whether switching mortgages is the right move – such as the rate, terms and conditions, redemption penalties, length of the mortgage and your own personal and financial objectives for the future – it’s well worth contacting a qualified and regulated mortgage broker who can explain the full implications of switching.
There is the added advantage that a broker will be able to quickly identify which lenders and products may be more suitable for you and your circumstances, saving you hours of research. In some cases, they may also have access to exclusive deals that you wouldn’t be able to find if you went to a lender directly.
Whether you go direct to a lender or use a broker, it’s well worth setting up an annual diary note to review your mortgage finance. Remember, even a slight reduction in your interest rate could result in a saving of thousands, if not tens of thousands of pounds over the lifetime of your mortgage.