Table of contents:
A Rise in Interest Rates
Effects on tenants
Effects on Landlords
Fixed Rate Mortgages vs Variable
Interest Rate Increases Effects on Letting Agents
A rise in interest rates
The Bank of England has released a word of warning in their predictions that the UK will fall into a recession lasting over a year, with skyrocketing energy prices and the fall out of the pandemic placing immense pressure on the economy.
With their caution came the biggest jump in the base rate in 27 years, which now sits at a startling 1.75%.
With the longest downturn since 2008, the B of E has predicted the steady shrink of the economy; set to begin in the last quarter of 2022 and heavily marching into 2023. With inflation vastly outstripping real wages at a shocking rate of 13%, the majority of UK households face a tough few years ahead with the country falling into a recession.
But what does this mean for the property market?
Tim Bannister, Director of Data Services at RightMove, claims that,
This increase in the base rate takes average monthly mortgage payments for new first time-buyers to over £1,000 if lenders pass on the rate rise to new applicants. This is approximately 40 per cent of the average first-time buyer salary, a level not seen since 2012
Let's look into what this means for renters, homeowners & landlords and letting agents.
What does an interest rate increase mean for tenants?
With the rise in interest rates and the very real likelihood of the UK falling into a recession, tenants should be very aware of what this means for them. Obviously, as interest rates go up, the capacity to earn from savings goes down and the amount a borrower must pay back goes up.
On the one hand, competition for new customers will heat up between the big banks during the recession, meaning better deals to empower money management in the most beneficial way for tenants. However, on the flip side, with the huge jump in interest rates, mortgage repayments will also skyrocket alongside it. This means the landlords who use rental income to cover the mortgage will most likely increase the rent for the tenants to somewhat cover the new financial burdens.
Alongside this, the worsening energy crisis is a heavy weight upon everyone's shoulders, particularly tenants who already face an increase in rent. A huge number of tenants are forecasted to really struggle during this time and will be wholly focusing on short-term goals of just managing to pay their bills. Rents are already on an upward spiral in 2022 (See rent price data here) and this likely only add to the trend.
Landlords
For many landlords, an imminent recession will cause an enormous amount of worry about the money they have invested in their property. For years landlords and property investors have been balancing on the advantage of particularly low-interest rates. With the announcement of another jump in interest rates, what are the consequences for landlords?
Karen Noye, a mortgage expert from Quilter stated:
For context, someone who took out a mortgage worth £250,000 over 25 years at around one per cent would pay roughly £942 per month. After today’s rise to 1.75 per cent, someone borrowing the same amount but at 1.75 per cent would pay £1,029 per month. What’s more is that if interest rates continue to climb to 2.5 per cent, monthly payments would soar to £1,121, a nearly £180 difference. This kind of pressure would certainly force someone to have to live their life differently to meet the new costs.
A rise in interest rates means an increase in mortgage repayments, which although worrying, will see delayed effects as it is a very gradual process with some experts even predicting that future rises will still leave interest rates super low in a historical context. This means although cheap mortgages will no longer be around, the mortgage contracts will remain affordable per se.
Are fixed-rate mortgages coming to an end?
No, but with the rise in the base rate, there is a capacity for lenders to pass the rise on to consumers and fixed rate mortgages will come at a higher cost for borrowers.
Those with fixed-rate mortgages may be protected from the effects of the increase for a while. Unless they are under a long fixed rate deal, when the deal comes to end it is likely they will have to face the fallout of increased mortgage repayments too. This will make their refinancing options more expensive.
Landlords with mortgage deals that include variable interest rates are likely to get the worst end of the stick as lenders are likely to hike up the rates which could mean a big jump in extra mortgage repayments. Therefore, those looking to remortgage will need to move fast as banks will change their conditions soon. However, increased competition between the banks will mean that exit fees and switching deals may work out cheaper than sticking with their current deal.
As a natural consequence, buy-to-let mortgages will increase in price, but maybe not as much as you expect. Just a 0.25% on the mortgage for an average-priced UK property will only mean a monthly increase of just under £20. Margins will be tighter following this, again however this will only have a small impact in comparison to changes in tax relief which are set to have a much bigger consequence.
Is your money safer in savings or a property?
A Landlord's wealth is obviously tied to his/her property asset and typically provides a much better return on investment instead of just placing money into a savings account. With the hike in interest rates is this still the case? Well even with this rise, it is highly unlikely that savings accounts will still offer a better return even on the worst buy-to-let. Inflation is staggeringly high. As such, money in savings is simply becoming less valuable by the day.
Another huge worry concerning landlords is whether property prices will fall. At the moment this is strikingly difficult to predict following an incredible set of turbulent world events. Most experts are still hopeful, predicting a 3-4% annual increase in property value over the following years.
Will the demand for rental property decrease?
With the rental market being as hot as ever, will the increase in interest rates cause this to cool off? In short, most likely not. Most professionals put down a decrease in buying and increase in renting down to the lack of affordability of mortgages resulting in people being forced to rent. If interest rates continue to soar, it will be even harder for people to meet the affordability criteria and therefore rent demand may actually increase further.
Are landlords likely to increase the rent prices following this announcement from the Bank of England? Possibly. When tenancies end, landlords may use this as a reason to bump up the rent on their properties to cover increased mortgage repayments should they sit outside of a secure fixed-term mortgage.
It is likely that newer landlords to the market may be pushed away by the incoming increase in interest rates. However, housing experts are still predicting that the buy-to-let industry will still flourish and find new opportunities in different ways- just like in the 80s when interest rates were circa 10%!
Letting Agents
For letting agents, there will be an influx of concern from all parties involved in tenancy agreements. For now, it's best to advise your landlords that they are still in control and if they wish to remortgage and enter a fixed rate mortgage for the next few years, they should do - fast! Encourage them to also minimise rent increases where possible as the majority of tenants are in financially challenging situations with the energy crisis and knock-on effects of the pandemic still having huge financial impacts.
It's important that Letting Agents keep their landlords happy with filling their properties with stable, excellent tenants who have easily passed an advanced tenant screening process. In times of financial hardship this is incredibly important as tenants are more likely to default. Landlords are more likely to rely on their rental payments as a valuable source of income. You could also ensure that every tenant enters Homeppl's rental income protection scheme, which guarantees rent and pays back in the case of defaults in one day.
In a nutshell
The announcement of increasing interest rates and an incoming recession will affect the property market from all angles. Property owners who had a huge advantage of historically low interest rates will face an increase in their mortgage repayments and those with variable interest deals are likely to be hit the hardest and quickest, tenants will suffer financial burdens if they are hit with increased rent prices alongside the hammering of electricity prices. However, on the upside, the rise in interest rates is likely to have a gradual effect; therefore, there is time to prepare for what is ahead.
Furthermore, in a historical context, interest rates will still be extremely low and tenants in locations that are not hot in demand are unlikely to be forced to pay more rent.
It is more important than ever that Letting Agents and Build to Rent Companies spotlight the importance of advanced tenant referencing in turbulent times.
