Buy to let landlords and aspiring first time buyers set to be hit by interest rate rise
The Bank of England’s decision to increase interest rates in the UK by 0.25% will affect several sectors of the property market, most notably aspiring first time buyers and buy to let landlords, according to industry views.
Tenants in the private rented sector could also be adversely affected if landlords with mortgages decide to pass on their higher costs by raising rents. However, experts pointed out that the rise to just 0.75% means that the interest on home lending is still very low.
According Nick Marr, co-founder of rental marketplace TheHouseShop, landlords who feel they have already been put under immense pressure by a raft of new legislation and changes to the Private Rental Sector over the past couple of years will not welcome the rise.
‘Many landlords are already feeling the strain on their finances from the Section 24 tax changes and increased stamp duty on second home purchases, plus there is the highly likely possibility of an increase in letting agency fees once the tenant fees ban kicks in. Adding to all these existing pressures with a further 0.25% interest rate rise could make it even harder for buy to le landlords to maintain their bottom line,’ he said.
He pointed out that research the firm carried out earlier this year found that almost one in three landlords were planning to raise rents in the next 12 months to help cover the increased costs of running their rental business. ‘With the added possibility of mortgage lenders upping their rates this proportion of landlords could increase even further,’ he said.
‘Unfortunately, this could mean that tenants end up taking on the cost of the rates rise, as buy to let landlords, in many cases, price their rental properties according to their mortgage repayments,’ he explained, adding that he believes that many landlords will be raising rents by 2% to 4% in the next 12 months.
Alexandra Morris, managing director of MakeUrMove, also thinks landlords will take a hit. ‘Many landlords will find that the increase in their mortgage repayments makes their current financial situation unaffordable, and will be forced to consider rent increases as a result,’ she said.
She explained that 40% of landlords the firm surveyed earlier this year indicated that the new laws, regulations and tax changes being introduced meant they were already considering increasing rents and 29% said a rise in the base rate was their biggest worry in 2018.
‘Clearly, this rate rise is now an added pressure which could be the tipping point that means a large number of landlords decide they have to pass on their additional costs to tenants in order for it to remain viable for them to let their properties,’ she pointed out.
When it comes to home buyers, John Phillips, operations director of Just Mortgages and Spicerhaart group, a rise of 0.25% should not have too much of an impact. ‘We have been hearing threats of another interest rate rise for a few months now, and many people have either switched or remortgaged onto fixed rate deals to negate any sudden rise to their monthly outgoings,’ he said.
‘How this latest rise will manifest itself with mortgage lenders is a big question. As we head into the final months of the year, with targets to be met, it is likely that there will still be enough good deals for those still on tracker or interest only mortgages who want to change before another rise, which is something that has already been mooted in today’s report,’ he added.
While borrowers on a fixed rate mortgage deal, especially a five year one, won’t be impacted until their current deal runs out, those with variable and tracker rate products will soon start to see their repayment costs rise as lenders begin to up their rates, according to Shaun Church, director at Private Finance.
‘The rise to 0.75% is fairly moderate and borrowers have been enjoying record low mortgage rates for some time now, so the immediate impact won’t be too severe. However, when it comes to interest rates, the only way is up,’ he said.
He pointed out that it is now likely that longer term fixed rate products will grow in popularity as borrowers seek financial stability. ‘10 year fixed mortgages provide a decade of immunity against rising rates and the average cost is relatively low at just 2.74%, compared to 1.73% for a two year fix,’ he explained.
‘However, they often come with early repayment charges if borrowers switch their mortgage deal before 10 years is up. Lenders should therefore offer greater flexibility if they wish to capitalise on the move towards long term products,’ he added.
However, the other way of looking at it, is that interest rates are now at their highest for 10 years. ‘It should act as a warning shot for home buyers and home owners. Yes, the cost of borrowing remains low, but interest rates are now at their highest in a decade and could continue to snowball, putting many in a perilous position when they come to buy or remortgage,’ said Russell Quirk, chief executive officer of Emoov.
‘Those looking to buy should be strongly advised against the temptation of borrowing beyond their means, as well as the importance of securing a fixed rate mortgage,’ he added.
But according to Henry Knight, managing director of mortgage broker, Springtide Capital, while the mortgage market had already partially priced in a rate rise, but it is likely there will be further increases as a result of this announcement.
‘Anyone with a tracker mortgage will see payments automatically rise and we can expect lenders to increase their standard variable rates at the same time, which will affect clients paying a variable rate mortgage,’ he said.
‘We would not expect to see rates rise again any time soon, certainly not until the outcome of Brexit negotiations are made clear. Developments regarding the UKs withdrawal from the European Union remain the most significant influence on the economic outlook, therefore raising rates now offers some wiggle room should they need to be brought back down in the future,’ he added.
But Sam Mitchell, chief executive of online estate agents Housesimple, there will be lots of homeowners feeling a little less financially comfortable. ‘A generation of home owners have never experienced a rate rise, and now they have had two in the space of a year,’ he said.
‘Plenty of home owners would probably admit they haven’t planned ahead for rate rises, unwisely assuming that rates wouldn’t rise for years. If you are thinking about taking out a mortgage, it’s always important to factor in possible rate rises to see if you could still pay the mortgage if rates went up by say 1%. Also, for anyone on a fixed rate mortgage, although they won’t feel the pain immediately, it’s worth checking what your monthly payments might go up to at the end of the mortgage term,’ he explained.
‘In particular, anyone on a two year fixed rate deal that was taken out just before the rate rise last November, the term will expire in just over 12 months and it’s inevitable they will be re-mortgaging onto a higher rate than they are on now,’ he added.
The majority of borrowers will be protected from any immediate effect as 95% of new loans are now on fixed rates and almost two thirds of first time buyers chose two year products in the last 12 months, according to UK Finance which represents almost all home lenders.
‘Rates are still at an historic low and borrowers remain well placed to get a good deal from the UK’s competitive mortgage market. And following an industry-wide agreement announced earlier this week, those borrowers on SVR or reversion rates who were previously unable to switch to a new product with their lender due to stricter affordability criteria now have the option to move to another product,’ said Jackie Bennett, director of mortgages at UK Finance.