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Interest rates held at historic lows – what does this mean for landlords?

Despite speculation that a rise was imminent, the Bank of England voted to hold the base interest rate at the historic lows of 0.1% at the most recent meeting of the Monetary Policy Committee – the body that decides on whenever interest rates rise, fall or stay the same.

It’s still been heavily mooted that interest rate rises are in the offing – if not this year, then next – to combat rising inflation, but for now, they remain at record lows, as has been the case since the start of the pandemic.

What does this mean for landlords, though, and what effect would interest rate rises in the near future have? Below, we take a closer look.

What’s the recent history of UK interest rates?

Interest rates have been at historic lows for more than a decade, to protect against factors as varied as the global financial crisis, Brexit and coronavirus. Every time it’s looked like interest rates will rise in a significant way, something has come along – first Brexit, then Covid – to put this on the backburner again.

The official Bank of England base rate was originally slashed to 0.5% in March 2009, as Britain attempted to stave off the damage of the global financial crisis. As the country recovered from this major economic shock, interest rates remained at 0.5% until August 2016, when they were slashed to 0.25% as a result of the political and economic uncertainty caused by the Brexit vote.

This was put back up to 0.5% in November 2017 as the economy stabilised, and then to 0.75% - the highest rate since March 2009 – in August 2018. Further interest rate rises had been expected, especially once the election and Brexit uncertainty in the second half of 2019 started to clear, but then came Covid and the need for interest rates to be cut back down to 0.25% on March 11 2020, before a further reduction to the historic low of 0.1% to protect the economy.

Rises are expected again soon to ensure inflation doesn’t get out of control, but there is no clarity yet on when these increases will come, and they are expected to be gradual and minimal when they do. There certainly won’t be a return to the very high-interest rates of the 80s and early 90s, or even the medium interest rate environment of the mid-Noughties, but it is highly unlikely they can be kept at such lows forever.

How do interest rates impact landlords?

Most landlords have a buy-to-let mortgage where they only pay each interest each month on their mortgage rather than traditional repayments. As a result, a low-interest rate environment is positive from a borrowing point of view as favourable deals can be locked in.

There have been calls by some for landlords and investors to lock in mortgage deals now before interest rates come into play. A number of banks, including Halifax, Nationwide, Barclays and Lloyds, announced interest rate rises for many of their mortgage products before the last Monetary Policy Committee meeting, in anticipation of a rise.

This could well happen again before the next meeting, so landlords may want to tie themselves into favourable mortgage deals now – locking in a good rate for the next three to five years. Low borrowing rates are obviously tempting, but there is a chance that landlords lock themselves into a fixed deal, interest rates don’t actually rise after all, and there are better deals on the market that could have been taken advantage of.

It’s a calculated gamble, but for those seeking the peace of mind of lower interest rates, fixing for three to five years might just be the best option at the moment.

House prices set to rise regardless

For those landlords who might be thinking to sell one or more of their properties, there may be worries that an increase in interest rates will cool the market. But many believe this won’t actually be the case, with momentum remaining resilient even in the fact of potential rises.

Business consultancy Hargreaves Lansdown recently predicted house prices will still grow, even after a possible hike in interest rates later this year or (now more likely) early next.

The prediction was made by Sarah Coles, personal finance analyst at the consultancy, following the latest government house price data which showed house prices bouncing back close to their record highs in August, after a small dip in July.

Coles insisted the erratic movement in price growth was inevitable after the stamp duty holiday changes. However, she added that ‘when these fall out of the figures, there’s every sign that prices will remain resilient – even after interest rates rise’.

She also believes the immediate outlooks for the property market aren’t as directly linked to the Bank of England base rate as once was the case. This is partly because most mortgages are currently fixed over two or five years.

“Those who are locked into rock bottom rates are protected from rate rises for a significant period. Those who have deals coming to an end within the next six months can arrange a new fixed-rate right now, which will kick in immediately after their deal expires,” she said.

“And while rate rises will be unwelcome, and will eventually feed into higher mortgage payments over the coming years, as yet, rate rises are being predicted at relatively modest levels, so there will still be deals available at historically affordable rates. So while we may see some of the heat come out of the market, we’re not currently expecting prices to fall.”

For the moment, then, nothing has really changed in terms of interest rate rises, but it seems a matter of when not if they will rise again. To offer the best protection against any rises, landlords may want to lock in new fixed deals now, but even if rates do rise there is still likely to be enough attractive deals on the market for quite some time yet.

If you want expert help with letting your home in the Canary Wharf, Surrey Quays and Rotherhithe areas, our friendly team will be available to assist with any further queries. We are not just focused on East London but cover central London and other parts of London too.

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