Property investors and buy to let landlords have been benefiting from a low interest rate regime for several years now. However, with the latest indication from the Bank of England Monetary Policy Committee let’s take a broad, practical look at what the impact on buy to let investment of higher interest rates could be.
First it’s important to realise that any rise in interest rates will probably be a very gradual process. Most experts are still suggesting that any future rises will still leave the interest rate at historic lows.
Also bear in mind that, following any rise, there is likely to be something of a delayed reaction. Some homeowners and landlords are on fixed rate mortgage deals. Many more are on standard variable rates which, more than likely, have the prospects of a rise already built into them. Some landlords don’t have any borrowing at all.
Of course, a rise in interest rates is something that all investors need to keep an eye on, so let’s look at what might happen if and when interest rates rise:
Will buy to let mortgages become that much more expensive? Undoubtedly they will cost more, but maybe by not that much. For example, a 0.25% rise on a £150,000 repayment mortgage (still enough to buy an ‘average’ priced property in the UK) means a rise in monthly repayments of just under £20.
Will margins be squeezed? Yes, but again probably only marginally for the foreseeable future. Other sources of stress on margins, such as changes to tax relief and so on are likely to have much more impact.
Will it be better to keep your money in the bank? Many landlords, of course, have put their money into property as an alternative to lower-than-low savings rates. However, even when interest rate rise it’s unlikely savings rates will become that much more attractive. Savings rates of over 5% – probably the absolute minimum needed to make keeping money in the bank more attractive than even the poorest buy to let – seem a very long time away.
What will happen to property prices? Will your investment fall in value? This is a very difficult one to call. If the cost of borrowing rises you would expect property prices to be impacted, but this is far from certain. Most analysts are still predicting property price rises of around 3-4% annually for the next few years, and have already factored interest rates into their forecasts.
It’s also worth bearing in mind that a shortage of property supply compared to demand in most areas is a big factor in pushing up property prices up. Both employment levels and wages are rising marginally, so these will also tend to support property price rises even in a more expensive interest rate regime too.
And that’s even before the thorny issue of Brexit.
Chances are it will depend, as so often in property, on location. Most areas will see probably see the value of property continue to rise in the face of rising interest rates. A few areas that benefit little or at all from any economic recovery, or which are heavily impacted by public spending and benefits cuts, might see falls.
What will happen to demand for rental accommodation? This is an interesting one. All the experts tell us that demand for rental property over the last few years has been underpinned by lack of mortgage affordability, meaning people have to rent rather than buy. When interest rates rise then, if mortgages become less affordable, there could be more demand for rental property, not less.
Past figures from PwC have suggested that home ownership levels will fall by 10% and most 20-39 year olds will be living in rented accommodation by 2025.
What will happen to rents? It’s important to remember there’s not really any connection between interest rates and rents. If your property is located in an area with strong demand it will probably be possible/necessary to raise your rents to cover rising interest costs. If it isn’t, it won’t be.
Will buy to let become unprofitable? A few commentators have already touted the ‘death of buy to let’, so is there any foundation to these claims?
It’s very likely that more amateur landlords will be dissuaded from entering the market at all or, faced with diminishing returns, might decide to exit it. However, professional landlords will find ways of making buy to let work even with higher borrowing costs and may find that there are more opportunities open to them, not fewer.
In the 80s and 90s landlords worked with an interest rate circa 10%!
With an interest rate rise on the horizon, what should landlords be doing?
As interest rates can only move in one direction, whenever that might happen, all landlords should be planning for a higher interest rate regime over the next decade. This might include: Checking their finances, and maybe taking full advantage of low fixed rates if remortgaging. Consider disposing of any poorly performing buy to lets that might become unviable. Looking at moving into property investments that offer enhanced yields. Here is an Insider article that might provide food for thought: 12 Ways To Improve Your Letting Yields
Lastly, it’s also important to remember that interest rate rises are contingent on improvements in the economy and rises in inflation, both very difficult to forecast in the current economic and political climate.