In the last few decades in the UK, the base interest rates have been on a rollercoaster ride, spiralling to dizzy heights before plummeting to record lows. All of this affects the economy as a whole, with savers and investors responding in kind.
The perspective on interest rates depends on which angle you’re viewing it from. As a general rule, savers like interest rates to be higher while those borrowing money for the purposes of investment profit more when interest rates are low. However, this isn’t always the case.
Buy to let investors are in a unique position of having profited from previously low interest rates and also being poised to benefit from rising rates too. Sounds confusing? Here’s what you need to know about the relationship between interest rates and buy to let investors.
A Brief Summary of Interest Rates
Often referred to as the “base rate”, the interest rate in the UK revolves around the rate at which the Bank of England lends money to other banks. This may not sound like it should affect the consumer but banks pass on any increase in charges. Therefore, the lower the Bank of England sets the base rate, the lower the amount of interest the banks will pass on to their customers.
The Bank of England has the right to change the interest rate; this is decided by the Monetary Policy Committee (MPC) who meet on a monthly basis. If the economy needs to be boosted by greater levels of spending and borrowing, the interest rate may be dropped. Conversely, if there is a risk that inflation could be rocketing, interest rates can be raised to bring spending back under control.
Put briefly, the base interest rate helps to influence the economy of the country and keep finances in balance.
As described above, the MPC have the responsibility of setting the base rate. Changes to this rate aren’t made lightly as the consequences can be significant.
After the UK made the decision to leave Europe in 2016, the now-famous Brexit vote, the interest rate dropped to an all-time low of 0.25%. Before this, it had been at 0.5% where it had stagnated for the previous seven years.
However, interest rates are not always this low. When the Conservative government wrestled back power in 1979, interest rates climbed to more than 17%. In the 1980s, they once again squeezed the bank balances coming in at more than 14% in 1981 and 1989.
The 1990s and 2000s saw much lower interest rates but the financial crisis in 2007 really hit hard. By 2009 interest rates stood at 0.5% and to date, they’ve barely recovered. Following the historic low of 0.25%, in November 2017 the rates increased to 0.5%. In August 2018 there was another small upward turn to 0.75%, where it sits now in 2019.
Interest rates remain low but experts believe there is likely to be a slow and steady upward trend in the coming years. For savers who have seen poor returns this is welcome news, but what about borrowers looking for mortgages? More specifically, investors with buy to let mortgages?
The Impact on Mortgages
For most borrowers, the news that interest rates are set to climb is not good. Higher interest rates mean that mortgage repayments will be higher, and may not be affordable for all.
However, buy to let investors are in a very different position. Having enjoyed the advantage of being able to purchase properties at extremely low rates in recent years, the potential rise could be welcome news. Of course just like any other purchaser, mortgage rates will be higher for any new house sale but for buy to let investors there are other advantages which outweigh this disadvantage.
Mortgage affordability is based on income and outgoings; in other words, the mortgage company must be satisfied that the individual can afford the repayments. A buyer must usually have a reasonable sum of money for a deposit and be comfortably able to meet the monthly repayment. When interest rates are high, everything costs more…including the mortgage. This may mean that not everyone will qualify for a mortgage, or be able to afford it.
This has the potential to deliver real profit to buy to let investors. In response to the need for more housing, the rental market heats up, with a greater number of people looking to rent rather than buy. Occupancy rates soar, particularly in sought-after areas, helping to maximise the return on the investment. When mortgages aren’t available, renting is the only real alternative which creates lots of competition.
This competition doesn’t only mean that there are no vacancies, it also allows rates to be pushed up. When mortgages increase, rental rates do too. This ensures that any corresponding hike in the buy to let mortgage rate is covered, as well as providing a bit of extra profit. With such demand for good rental properties, prospective tenants willingly pay the higher rates creating a true win/win situation for buy to let investors. Buy to let is still a great investment!
Other Factors to Consider
The resilience in the rental market is one of the biggest benefits for buy to let investors but there are other factors to consider too.
As a serious stream of income, buy to let investments have to be managed very carefully in order to ensure they return a profit. Many investors will therefore choose to protect their monthly outgoings by opting for a fixed rate or capped mortgage. This means that when interest rates climb, there’s no risk of spiralling repayments. At the same time, rental prices can still be increased in line with the market, generating even greater profits.
Although buy to let investors may be looking to expand their portfolio, if they already have a property and mortgage in place, they may be largely unaffected by the rising costs of higher interest rates. In addition, the value of their existing properties will increase, creating a more valuable asset.
Even investors seeking their first buy to let property needn’t be seriously concerned by a rise in interest rates. While they may have to pay more than those who already have their mortgage in position, the high demand for rental properties and the robustness of this market means that a healthy profit is still there for the taking. If you’re considering your first buy to let investment, why not read our guide to ensure you know the details? Guide To Buy To Let pt 1. For advice on your first/next investment, get in touch with the experts at Aspen Woolf who can help you find the perfect investment opportunity.