How Rising Interest Rates Will Affect Buy-to-Let Investors
The Bank of England announced on Thursday, 3rd August, that it has increased its base rate of interest to 5.25%, the fourteenth straight raise in interest rates in a row. This comes after RWinvest reported on a rise in interest rates in June this year, when rates rose to their highest level in 15 years.
This has been done to combat the rising rate of inflation the UK is currently facing, in an effort to combat the period of inflation that the country has been facing.
Not since 2008 have interest rates been this high, and given how bleak the UK’s financial situation was back then, this news has many worried.
In this blog, we’ll explain why interest rates have risen once again, what may happen in the immediate future and explain what it means for the buy-to-let property market.
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Why Have Interest Rates Risen Again?
The Bank of England has raised interest rates yet again to speed up the rate at which inflation is falling.
Although inflation has begun to fall since the Bank of England last raised rates in late June 2023, they want to ensure this remains the case and that it happens at a faster rate.
The Bank of England is looking to reduce inflation down to a target of 2%, down from June’s recorded rate of 7.9%.
According to an article on rising interest rates reported by Sky News, the Bank’s governor, Andrew Bailey, said “We need to make absolutely sure that it falls all the way back to the 2% target. That’s why we’ve raised rates to 5.25% today.”
Raising interest rates helps to calm inflation as it encourages the public to save money rather than spend, as goods such as houses, cars or equipment where you may have to borrow money become more expensive.
This puts a strain on the public as goods will not be as affordable. The hope is that this will lead to a drop in spending, which will cause prices, and inflation with it, to fall.
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What Does This Mean for the Property Market?
For the property market as a whole, this means that mortgage rates are set to once again rise as mortgage brokers look to match this rise in interest rates.
Given that the last rise in June was 0.5%, this is likely not going to be as steep a rise as last time, but it will still be felt by millions of homeowners across the UK.
BBC News reported on mortgage rates hitting a fifteen-year high in July, and although they have started to drop since then, this will likely see a higher increase.
For homeowners on variable-rate mortgages, this means a rise in mortgage repayments. For those looking to borrow a mortgage, this means they will be facing a higher interest rate on their mortgages.
This is done to try and encourage people to save money rather than make expensive purchases. If inflation continues to drop, then we can expect mortgage rates to go down with it.
The Prime Minister has pledged to halve inflation by the end of the year, and this is likely to become a reality thanks to the latest interest rate hike.
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What Does This Mean for Buy-to-Let Investors?
There are two main ways that rising interest rates will affect buy-to-let property investors.
The first, as mentioned above, is that interest rates on mortgages will rise. Buy-to-let mortgages already have higher rates of interest than standard residential mortgages.
This will make BTL mortgages unaffordable for many would-be investors and will cause many to struggle to make their current repayments.
One effect that this may have is landlords raising their rent to generate enough income to pay their mortgages.
The second major effect this will have is more of a long-term one that will not have an immediate impact. Spending will likely fall across the housing market due to mortgage rates, which could cause house prices to fall.
In the immediate future, this is bad news for investors looking to sell their investment properties, as they will not benefit as much from capital appreciation as they would have.
However, this is actually good for the buy-to-let market, as not only will properties become more affordable to invest in, but this is likely to be only a temporary fall in prices.
Therefore, investors would be wise to hold onto their buy-to-let properties for longer than intended, to make a better return on investment once property prices had risen once again.
One thing this does mean is that off-plan properties are more viable than ever, thanks to the flexible payment plans they come with, meaning investors can avoid the costly interest rates of mortgages. You can read about some of the benefits of buying off-plan property in one of our helpful guides.
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Property investment is one of the best long-term investments as of August 2023 and beyond for those looking to build wealth over time.
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