The other week, the Bank of England’s MPC raised UK rates from 0.25% to 0.5%, the first move higher in rates for almost a decade. What will this do to the property market and buy-to-let investors? Well believe it or not, most mortgages issued in the UK are fixed term deals (80% of new loans are on fixed term deals and 50% of all outstanding mortgages according to CML figures), so initially this may have very little impact at all. However, those on standard variable rate deals and trackers will be impacted. It is important to note that this does need to be kept in context, and although there has been a doubling of rates they are still sat at an exceptionally low level.
To understand the mortgage market, you need to understand that rates alone do not dictate the cost of a mortgage, although they are of course an integral component. The main driver is whether banks can get their hands on cheap money to lend out. They usually get it from savers or by borrowing from other banks on the money markets, buying money at a certain rate – the “swap” rate – for a certain period. These swap rates react to expectations of future interest rates and inflation, which affect the price of mortgages. With rates expected to rise again and inflation moving higher there is obviously an expectation for rates to go higher but with market competition and a certain degree of market stagnation there may well be a delay. Overall, this is the driver of these mortgage rates, but there is still opportunity to fix mortgage rates at historically low levels and therefore reduce the impact of future rate hikes.
On the data seen, many of the borrowers who have deals that are due to expire within the next year or less will look to re-finance into new fixed term deals, and despite the fact that UK rates are expected to gradually rise, the deals out there are still historically very cheap. Moneyfacts data shows average two-year fixed rate deals of 1.57% up to 60% LTV, and 2.46% up to 75% LTV. Even up to 90% LTV, deals are available at 2.73%. So with deals out on the street like that there is still plenty of opportunity to cover off expected rate hikes from the MPC, and therefore we feel that all the latest indicators show us that with demand in the buy-to-let sector remaining strong and prices still attractive, the market impact in the short term is minimal. For more information about the Buy to Let market, or to find a buy to let investment tailored to you and your needs, call us today and speak to one of our friendly property specialists.