Incase you missed it, The Bank of England raised the base rate from 0.25% to 0.5% this week. The base rate is the Bank of England’s official borrowing rate, which influences what borrowers pay and savers earn. The base rate has remained fairly static over the last decade, with 0.25% being the lowest on record. Thursday’s increase was the first since July 2007.
What does the increase mean for mortgages?
There are 9.2 million households across the UK that have a mortgage. Around half are those are on a standard variable rate (svr) or a tracker rate. That means between four and five million households are about to be impacted by the base rate increase.
Those lenders on a standard variable rate (SVR) or ‘discount’ mortgage, where the rate is set by the lender, are going to see an increase in their payments almost immediately. A 0.25 percentage point rise could cost roughly £200 a year more per £100,000 of outstanding mortgage.
If you’re on a tracker mortgage, there are no ifs or buts about it. You will definitely see a rise in your mortgage payments, as these deals ‘track’ the base rate and therefore will increase. Therefore it may well be worth considering going onto a fixed mortgage deal now.
Those who have a fixed-term mortgage can sit comfortably…for now. Unless their deal ends very soon, they won’t see any immediate change to their payments. However, when their fixed-term agreement comes to an end, they need to be prepared for higher interest rates when looking at new fixed term deals.
Will there be another rise?
The key message from Bank of England governor Mark Carney is that there’s not likely to be another rise imminently but that rates are likely to rise twice more over the next three years. He said: “The Monetary Policy Committee continues to expect that any future increases in interest rates would be at a gradual pace and to a limited extent.”
What’s the impact for the rental market?
As Mark Carney reminded us, future rises in base rates will be small, and the pace will be gradual. But regardless of when and how small, the only way is up and any increase to interest rates, pushes mortgages up. Canny investors will look for really good fixed deals to try and ring fence their investments. But thinking past the length of those fixed term agreements, landlords need to be sensible, think ahead and factor in any further rises. Make sure your investment deal stacks up at a higher mortgage rate, because if the rates continue to rise and reach some of those high rates that were seen in the early noughties (say 6%), then profit margins could be hugely affected.
This graph tracks the Bank of England base rate since January 1985:
It’s sobering isn’t it! The low of 0.25% was great while it lasted, but a rise was inevitable. And despite Mr Carney trying to placate the public with promises that further rates will be gradual, nothing is guaranteed. My view is that landlords should look at higher-yielding investments – such as HMOs – to ensure they will make enough profit to get a good return on investment. If you need a good mortgage broker please get in touch and I can help.
What do you think? How are the rises going to affect your investment prospects? I’d love to hear from you. Get in touch via LinkedIn, join my discussion group over on Facebook or email me at firstname.lastname@example.org.