The Bank of England Monetary Policy Committee (MPC) made the decision yesterday to raise interest rates to 0.75%. This is the first time that the base rate has risen above 0.50% in almost ten years.
David Whittaker, chief executive of Keystone Property Finance and buy-to-let mortgage broker Mortgages for Business has commented on this decision: “The 0.5% Bank Rate has finally met it’s Waterloo. The futures market has been calling a 91% probability that the rate would move up recently – so this isn’t exactly an about turn for the MPC. That doesn’t change the fact that it can’t have been an easy call for the committee to make.
The jobs market aside, the economy isn’t going great guns at the moment and the possibility of a no-deal Brexit – or, indeed, an early general election if the Government falls – will have made the decision harder. But it won’t take lenders long to nail their colours to the mast and adjust their pricing, particularly those who have spent the last year absorbing costs instead of passing them onto borrowers. Shorter-term fixed rates are likely to be the first to be punished. We may even see lenders hold off a little longer before adjusting five year fixed products. But mortgage rates will be going up sooner rather than later. Borrowers will have to expend a bit more blood, sweat and tears reworking their sums and cash flow projections.”
Ludo Mackenzie, Head of Commercial Property at Octopus Property, has said:“This [decision] is significant yet unsurprising. Whilst the residential and commercial property sectors, particularly in London and the South East, continue to face challenges, stakeholders should be in a robust enough position to stomach a 0.25% increase and small, well signposted steps, should be welcomed.
Yes there will be winners and losers, but over the longer term it is to be expected that rates should normalise; something that is in the interest of a properly functioning economy.”
Charlotte Nelson, Finance Expert at Moneyfacts.co.uk, has laid out her evaluation of this increase:
Savings
“Today’s rate decision is a beacon of hope for savers, who have grown tired of the low rates that have plagued them for so long. This base rate rise carries much expectation, with savers hoping it will boost returns. However, just like the rise in November, providers are likely to be selective with the rates they choose to increase.
“Fuelled by intense competition from newer banks, the fixed rate bond market has notably improved since the last base rate rise in November. For example, the average two-year fixed rate stood at 1.43% in November 2017 and has climbed to 1.58% today. The average five-year fixed rate has also grown, rising by 0.16% to stand at 2.15% today.
“However, rates still have a long way to climb, as back in February 2009 – the last time base rate stood above 0.50% – the average easy access account paid 1.19%, whereas now it pays just 0.53%. The average one-year fixed rate bond stands at 1.34% today, a whopping 1.60% lower than back in February 2009.
“Every saver now has their fingers crossed that this latest base rate rise may go some way to returning rates to those levels, but like last time, providers are likely to be slow to react and choosy with their increases. This means savers must be on the ball to ensure they get the best possible deal. Regardless of whether their rate increases or not, savers should use this latest rise to assess their options and ensure that, at the very least, their account pays more than base rate.”
Mortgages
“With the vast number of lenders increasing rates in the lead up to May’s rate announcement, providers have chosen to keep rates relatively static in the run-up to this one, having already been prepped for a rise. However, some lenders have increased rates, with 28 providers increasing some rates in July some more than twice. This has seen the average two-year fixed mortgage rate increase from 2.33% in November 2017 to 2.53% today.
“Longer term fixed rates are likely to be more popular now among borrowers as they try to protect themselves from future base rate rises. This increase in demand has seen five-year fixed rates grow at a slower pace. For example, the average five-year fixed rate has increased by just 0.05% since November 2017 stand at 2.93% today.”
Shaun Church, Director at Private Finance has commented:“Today’s rate rise will inevitably have a knock-on effect on the mortgage market. Borrowers on a fixed-rate deal have little to fear, as they won’t be impacted until their current deal runs out. Those with variable and tracker rate products, however, will soon start to see their repayment costs rise as lenders begin to up their rates.
“The rise to 0.75% is fairly moderate and borrowers have been enjoying record-low mortgage rates for some time now, so the immediate impact won’t be too severe. However, when it comes to interest rates, the only way is up. It’s likely that longer-term fixed rate products will grow in popularity as borrowers seek financial stability. 10 year fixed mortgages provide a decade of immunity against rising rates and the average cost is relatively low at just 2.74%, compared to 1.73% for a two-year fix*. However, they often come with early repayment charges if borrowers switch their mortgage deal before 10 years is up. Lenders should therefore offer greater flexibility if they wish to capitalise on the move towards long-term products.”
Angus Stewart, Chief Executive of digital start up Property Master, said of today’s Bank of England Monetary Policy Committee decision to raise the base rate:“A rise in base rate has been trailed for quite some time so today’s announcement will not come as a surprise to many. The economy seems to have recovered its bounce following bad weather earlier on this year and this better economic data has finally forced the hand of the Bank. “
“Our recent July Mortgage Tracker, which follows rates and fees from 18 of the largest lenders in the buy-to-let market, showed that the cost of popular buy-to-let fixed rates deals has continued to fall since the start of the year.
Five-year fixed rate mortgages have been particularly competitively priced with the monthly cost of borrowing a typical amount of £150,000 falling between £11 and £24 compared to the cost if the loan had been taken out in January. Given today’s news of a base rate rise landlords who are looking to borrow to buy a new property or refinance their existing portfolio may need to move very fast indeed if they are going to benefit from some of the good deals we have seen.”
Jonathan Ivory, MD of build to rent operator, Atlas Residential, has also commented on the impact of this rise:“Despite historically low interest rates for almost a decade, home ownership is increasingly out of reach for low and middle income earners due to the widening gulf in the ratio between average incomes and house prices.
Today’s uptick in interest rates will increase the cost of variable and tracker mortgages for millions and hence further enhance the attraction of renting, specifically the ever increasing number of communities that are professionally run and institutionally owned.”
Nick Marr, Co-founder of rental marketplace TheHouseShop.com, comments on the impact of the interest rates rise for tenants and landlords:“We were all expecting the announcement of the interest rates rise today, but that won’t make it any easier for mortgage holders and landlords to deal with. Landlords have already been put under immense pressure by a raft of new legislation and changes to the Private Rental Sector over the past couple of years. Many landlords are already feeling the strain on their finances from the Section 24 tax changes and increased Stamp Duty on second home purchases – plus there is the highly likely possibility of an increase in letting agency fees once the Tenant Fees Ban kicks in. Adding to all these existing pressures with a further 0.25% interest rate rise could make it even harder for Buy To Let landlords to maintain their bottom line.”
“Our research from April this year showed that almost 1 in 3 landlords were planning to raise rents in the next 12 months to help cover the increased costs of running their rental business. With the added possibility of mortgage lenders upping their rates – this proportion of landlords could increase even further.”
“Unfortunately, this could mean that tenants end up taking on the cost of the rates rise, as Buy To Let landlords, in many cases, price their rental properties according to their mortgage repayments.”
“Renters are largely unaware of how interest rate rises and tax changes can have a knock-on effect to the amount they pay for their housing. While the supply and demand rules of the market should minimise the potential for any extortionate rent increases, I believe we will see many landlords raising rents by 2-4% in the next 12 months.”
Paul Haywood-Schiefer, a Manager at tax and advisory firm Blick Rothenberg, said:“For many people who were getting no return on their capital due to long term low interest rates and decided to invest in buy to let properties this will be another blow.”
“They wanted to get better returns and for many it was also part of their retirement plans.”
“The increase in the Bank of England base rate will have a knock on effect on mortgages for thousands of people.
“Those buy to let investors with mortgages may be some of the worse affected as not only do they have to deal with increased interest repayments, they will also be dealing with the fact that for the current tax year, they will only receive full interest relief on 50% of the cost of interest incurred, with the other 50% only receiving basic rate tax relief.”
“The amount liable to full interest relief will reduce by a further 25% from April 2019 and from April 2020; interest incurred will only attract basic rate tax relief.”
“At the moment this is all new and as buy to let property owners pay tax on the income they earn from this through their tax returns, many of them willnot have yet calculated the position that the reduced interest relief will have had on their profits from 2017/18.”
“Once they see the reduced profits, they could put up rents to ensure their yields, which will be bad news for those renting and trying to save for properties of their own.”
MakeUrMove managing director, Alexandra Morris, commented: “Despite there being plenty of good landlords out there who want to keep the impact on their tenants to a minimum, the reality of the situation is that now the Bank of England has raised the base rate, many landlords will find that the increase in their mortgage repayments makes their current financial situation unaffordable, and will be forced to consider rent increases as a result.
“40 percent of the landlords we surveyed earlier this year indicated that the new laws, regulations and tax changes being introduced meant they were already considering increasing rents and 29 percent said a rise in the base rate was their biggest worry in 2018. Clearly, this rate rise is now an added pressure which could be the tipping point that means a large number of landlords decide they have to pass on their additional costs to tenants in order for it to remain viable for them to let their properties.
“The Government are currently sleepwalking into an ever deepening housing crisis and the Bank of England base rate rises are adding to the burden felt by many landlords. This is particularly concerning when private landlords provide a vital role as the backbone of the UK housing market.”
