How will base rate increase affect landlords?
The dust has settled since the Bank of England announced their decision to raise interest rates for the first time in 10 years. Since then we’ve had a number of conversations with buy-to-let landlords who are considering their options following the announcement.
The Bank of England’s Monetary Policy Committee announced on the 2nd November at midday that there would be ¼ of a percent rise in the base rate (BOEBR) from the historic low of ¼ of a percent, where it has sat since July 2007.
The housing market will likely be one of the first places to feel the impact of the base rate rise and whilst the housing market has been resilient since Brexit and the recession, this small increase may be the first test of the UK’s overall resilience to market shifts.
The most vulnerable will be those individuals who are already on a standard variable rate (SVR) mortgage, as well as private landlords who are being increasingly hit by the financial implications of changing tax rules and additional regulations.
Although a 0.25% increase in base rate is a relatively small increase, this is a clear indication to the markets that we are returning to a period of normalisation following the post-credit crunch and recessionary period. It may make some landlords, who are about to sign long-term tenancies take stock and consider their options, whilst it may unnerve others.
For those landlords who have been holding off passing on the costs associated with tax and regulatory changes, this might be a deciding factor and see a ripple of rent rises throughout the private rented sector.
The biggest factor that landlords need to consider is the impact of the real term wage squeeze being felt by their tenants and potential tenants. This is especially important when considering rent rises in the coming year.
Whilst it’s not likely that the increase of 0.25% at the start of this month will be the straw that breaks the camel's back, we will start to get an indication for how this increase impacts on everyday life.
And although we aren’t yet seeing any negative impact on the housing market, we should be aware that house price inflation has already slowed and the consequences of negative equity could creep in relatively easily. Especially for those who have bought property recently.
One of the most worrying statistics comes from the Financial Conduct Authority (FCA) which suggests that as many as one out of every seven mortgage holders wouldn’t be able to cope should rate rises increase their mortgages by just under £100 a month.
However, we are some ways away from seeing mortgage repayments going up by £100 a month, with 0.25% representing in the region of around £25 for the average mortgaged household and £25 is probably manageable for the majority of people on an SVR mortgage.
If you are on an SVR or tracker, this new base rate rise will represent an approx. £21.00 extra per month, per £100K of borrowing.
- £100,000 x 0.25% = £250.00, or £20.83 pcm
- £200,000 x 0.25% = £500.00 or £41.66 pcm
- £300,000 x 0.25% = £750.00, or £62.50 pcm
- £400,000 x 0.25% = £1,000.00 or £83.33 pcm
But as a landlord, if you’ve got a buy-to-let mortgage, you’ve probably already got a mortgage on your own home as well. Landlords in this situation, many of whom are in no better a cash flow position than most people, could find themselves hit twice as hard as other mortgage holders.
There are currently around 3 million mortgages on standard variable rates. With recent reports suggesting the housing market has seen a record drop in confidence - now sitting at a five year low - a significant number of people will potentially be impacted by the change.
The National Institute of Economic and Social Research has carried out research suggesting that UK households are up to £600 worse off since the Brexit referendum.
Whilst the small increase in interest rates we’re experiencing at the moment may not be too much to worry about, a sudden spike in interest rates could have the unanticipated effect of inflating house prices. However, in all likelihood, it’s unlikely that adding up to £100 will have any impact on what landlords decide to do with their long-term investment.
The increase in interest rates should not come of a surprise to anyone considering there has been rising inflation and a stagnating economy for some time now.
Before you make any decisions based on the interest rate rise announced at the start of November it’s worth waiting for the Autumn budget. During the Autumn Budget, we expect there will be some ways to help reduce the pressures on the housing market and help support property buyers.
The levers the government has to pull, to help the housing market remain buoyant, include stamp duty, but it remains to be seen if the government will reverse recent trends to strengthen and protect the role of landlords in the UK's housing market.
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