The impact of interest rate rises on property investors
Last August, the Bank of England raised the base rate from 0.5% to 0.75%. At the time, it was suggested that there might be another single rise in 2019.
However, that hasn’t yet materialised – probably because of continuing uncertainty over Brexit. But there is still time. Let’s take a look at what this means for property investors.
Will a rate rise affect property values?
When interest rates go up, so do mortgages. Plus, with higher interest rates, banks can have less access to funds to lend. As a result, there’s a reduction in the number of mortgages available.
This can mean a decrease in the sales of property. In turn, this can lead to a drop in prices. But this may not happen – it generally depends on what the reason was behind the interest rate rise.
For instance, if an interest rate rise is made because of a robust economy, it tends to mean that wages are increasing as well. In this situation, the rate rise is unlikely to impact on property values because the growth in salaries covers it.
What will happen to mortgage payments?
Whether this affects you as a property investor will depend on the type of mortgages you hold.
If you have an interest-only mortgage, then you could find yourself more affected than if you hold a repayment mortgage. For example, a 0.25% increase on a £150,000 interest-only mortgage will equate to a rise of about £30 in your monthly payments.
Whereas if you have a repayment mortgage of the same amount, based on a rate of 2.25% over 20 years, you would see a rise of £18 in monthly payments. If you hold a fixed-rate mortgage, then you’ll be unaffected until your fixed deal comes to an end.
If you’re on the lender’s Standard Variable Rate (SVR), this will rise in line with the interest rate rise percentage. Your monthly repayments will immediately increase. The same goes for a tracker mortgage, which will climb with the base rate hike.
Can I switch to a new deal?
If you’re on the lender’s Standard Variable Rate (SVR), then it will be easy for you to switch to another mortgage. However, if you’ve signed up for a fixed or tracker deal, you’ll have to wait until that contract has ended.
Check how long your deal has to run and if there are any early redemption fees. Work out if you gain anything by switching or staying put until the deal has ended.
When you’re free to switch, shop around. It’s easy to compare mortgages online or talk to a broker, who can advise on the wider mortgage market.
What’s important is to be prepared. Assess the various scenarios before choosing your mortgage product. A tracker could offer an attractive rate, to begin with, but will be less appealing after a couple of interest rate rises.
Generally, it pays to be prepared to do well for about half of the period of your contracted mortgage deal and not so well during the other half. Expect it to balance itself out. Plus, calculate the likely cost of a couple of interest rates rises and have a contingency fund in case of emergencies.