Over recent times, the Bank of England has been placing strong emphasis on the need to ensure that borrowers are able to service their loans, even if interest rates rise. Now this event has happened, it has raised rates for the first time in around ten years. Only time will tell if this was a one-off or the shape of things to come, but as the old saying goes, hope for the best and plan for the worst. With that in mind, here are four points about what rate these interest rises could mean for buy-to-let landlords.
Mortgages get more expensive
If you’re on a tracker mortgage, the increase will probably be passed on fairly quickly and for those on fixed-rate deals, you will have until the end of the fix before any rises start to make an impact on your mortgage. Those looking for new mortgage deals may very well find that lenders soon price in the potential for future rate rises, with the result that the security offered by a fixed-rate mortgage may come at a high price.
Changes to mortgage tax relief may hit higher-income borrowers particularly hard
The government is changing from a system in which landlords declare rental income net of mortgage expenses, to one in which income is declared gross and an allowance for mortgage interest is applied, this is due to be reduced, in stages, to 20%. As has already been extensively covered in the media, this is a significant setback for higher-income borrowers and may already be enough to turn an otherwise profitable investment into an unprofitable one. Interest-rate rises will simply exacerbate this.
Higher interest rates should make it easier to save for a deposit
Higher interest rates are, of course, good news for savers, although the recent increase is unlikely to have many jumping for joy and turning their investments back into cash deposits in savings accounts. In theory, however, if interest rates continue to rise and house prices remain stable (or even decrease) then it should be easier for renters to raise a deposit and become buyers.
Higher interest rates tend to be used to counteract higher inflation
Higher interest rates may be good news for savers, but you need to have spare cash to be able to save, high inflation can easily eat up any spare funds lower earners once had. This means that while, in theory, it should be easier to save for a deposit, in practice tenants may have to prioritize standard living expenses over saving and may even look to downsize to more affordable rental properties.
The fundamentals of any market are the laws of supply and demand and given that the UK has long had a chronic under-supply of housing, there is still a clear argument in favour of buy-to-let investment. On the other hand, landlords, particularly smaller-scale ones, may come to the conclusion that buy-to-let has become too politically-charged and that it is time to move on. Those in the latter camp may wish to look at other ways of investing in property, such as investing in property developers or in commercial property, including student accommodation and retirement homes.