The Latest Interest Rates: Affecting Buy to Let? | Flambard Williams

What Does the Latest Interest Rate Mean for the Buy to Let Market?

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.

Further reading