Interest Rate Stays a 5.25%: What Does This Mean for Buy-to-Let Investors?

In a surprise move, the Bank of England has decided against raising the base interest rate.

Until September 2023, the Bank of England had raised the base rate 14 times in a row.

Earlier in the week, inflation dropped from 6.7%. However, experts predicted the Bank of England would raise rates again.

The Bank of England’s decision not to raise the interest rate suggests that rate increases may have peaked.

The reasoning is that higher interest makes people less likely to borrow money. Therefore, households will limit their spending, and companies will be less likely to raise prices.

However, the Bank of England needs to show caution. If rates rise too much, people will limit spending to the point where economic growth slows and companies struggle to survive.

According to the Bank of England Monetary Policy Committee, inflation had fallen to 6.7% in August – much faster than predicted.

The committee also suggested there were signs higher rates were harming the nation’s economy.

Unemployment has risen slightly, and economic growth has been weaker than forecast.

However, the MPC also said rates would continue to be “sufficiently restrictive for sufficiently long” until inflation falls to the Bank of England’s 2% target. The economy is not expected to reach that target until 2025.

While the interest rate stall is promising, further rates may be required if prices begin accelerating in the future. This news is quite important to property investors all over the world, who are monitoring financial markets closely.

Speaking on unchanged interest rates, Chancellor Jeremy Hunt said:

“We are starting to see the tide turn against high inflation, but we will continue to do what we can to help households struggling with mortgage payments.

“Now is the time to see the job through. We are on track to halve inflation this year, and sticking to our plan is the only way to bring interest and mortgage rates down.”

Following the 2008 financial crisis, UK interest rates fell to some of the lowest levels in history.

Further cuts followed the UK Brexit vote in 2016 and the Covid pandemic, bringing the rate to 0.1%.

However, rates grew toward the end of 2021 and accelerated when Russia invaded Ukraine, sending fuel and food prices soaring.

This week’s decision to stop raising interest rates marks the first meeting since November 2021 that the MPC has decided against an interest hike.

When interest rates increase, the housing market usually slows down.

When interest rates rise, so do mortgage interest rates, which reduces demand for property investment and leads to a price drop.

On the other hand, when interest rates fall – and it looks like we may finally be heading in that direction again – mortgage rates become cheaper. In turn, demand for housing increases and property values eventually go up.

When inflation figures decreased in August, lenders reacted by lowering mortgage rates. For instance, Moneyfacts reports that two-year fixed-rate deals fell to 6.79% – from 6.81% – when inflation started to decrease. In addition, five-year fixed-rate deals dropped 0.02% to 6.31%. This was the first time both rates fell together since May 2023.

Inflation forecasts predict the rate will fall to 4-5% by the end of the year. This would see a gradual decline in fixed-rate prices as the market’s direction becomes clearer over the next couple of months. This should make it for people wondering what to invest in right now in 2023.

While it is too early to say whether mortgages will become cheaper in the long term, the September interest rate and inflation rate are cause for cautious optimism. If numbers continue to decline, buy-to-let investors may see mortgages become even more affordable over the next 12 months.

This news was prepared by the property investment company RWinvest.com