Interest Rates and BTL Mortgages

  • Interest rates held for the time being
  • Bank of England signalling gradual rate rises
  • Higher rates may affect landlords’ profitability
  • BTL mortgage rates low and still falling
  • Worth considering locking into a fixed BTL mortgage deal

On 3rd August, the Bank of England’s Monetary Policy Committee (MPC) met to decide the UK’s base rate of interest. Once again, it voted to keep the rate at its current historic low of 0.25%.

The decision came as little surprise to many forecasters who  pointed to a sluggish economy and the continuing economic uncertainties arising from Brexit – neither of which, they argued, would benefit from an increase in the cost of borrowing. Britain’s GDP growth slowed to 0.3% in the second quarter of 2017, and this news will have featured prominently in the MPC’s discussions. Businesses generally need credit to fuel their expansion, so to have raised interest rates would have risked curtailing economic growth at a time when Britain is already floundering at the bottom of the table of G7 economies.

The MPC members will doubtless have been aware that a rate rise would also further damage a housing market that has been hard hit by problems of affordability. Consumer borrowing is already approaching a record high and to raise interest rates now would likely put further pressure on prospective homebuyers.

Nevertheless, the vote was not unanimous; it was split 6 to 2. Partly, the pressure to raise rates arises from the need to keep inflation in check – something the MPC has failed to do in recent months. This pressure was alleviated a little in June when inflation was lower than forecast (2.6% rather than 2.9% the previous month) but the rising cost of living is still very much in the Committee’s sights, as the minutes of the meeting reveal.

The minutes state: In the MPC’s central forecast, GDP growth remains sluggish in the near-term as the squeeze on households real incomes continues to weigh on consumption… The MPC expects inflation to rise further in coming months and to peak around 3% in October, as the past depreciation of sterling continues to pass through to consumer prices. Conditional on the current market yield curve, inflation is projected to remain above the target throughout the forecast period. This overshoot reflects entirely the effects of the (Brexit) referendum-related falls in sterling.

Given that the Bank of England evidently has little confidence that inflation will fall back in line with its 2% target, there seems a growing likelihood that the MPC will eventually raise interest rates. However, Mark Carney has signalled that should it do so, the process would be slow and incremental. The report’s summary stated: “All members agreed that any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.”

The Committee also appeared to acknowledge the limitations of using interest rates to control inflation, saying: “attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth.” In short, there seems little appetite for risk, given the shakiness of the domestic economy.

 

Responding to the announcement – which came with a warning that “monetary policy could need to be tightened by a somewhat greater extent” than markets had previously been expecting – the National Institute of Economic and Social Research revised its predictions, concluding that a rate rise was now more likely to occur in the first three months of 2018, rather than in 2019 as it had previously suggested.

Implications of a rate rise:

If and when the base rate rises, borrowers will almost inevitably see an increase in costs. Businesses will see a rise in the cost of credit and consumers will feel the pinch on everything from mortgages to credit card repayments.

The MPC will therefore be careful about the speed at which it increases the base rate. The Bank of England has already recognised that consumer credit has become a cause for concern, with the value of outstanding loans on cars, credit cards and other personal debts rising by 10% over the past 12 months. This compares against average incomes, which have risen by only 1.5% over the same period – less than the rate of inflation. The Financial Conduct Authority recently reported that 2.2 million borrowers are now in financial distress, despite the low cost of borrowing, so to add to people’s costs at such a time would inevitably increase the risks of hardship and repossessions. A “slow and steady” approach by the MPC therefore seems wholly understandable.

Interest and mortgages:

Of course, any rate rise is going to be unwelcome news to landlords who have already had to contend with a number of tax-based assaults on their profits. Now, however, property investors can insulate themselves against the effects of an increase by taking advantage of some very hospitable conditions within the buy-to-let mortgage market.

At the start of the year, there was a pronounced drop in the number of BTL mortgage products available to investors,  but lenders have since found a new confidence and competition is once again fierce.

On 31st July, Moneyfacts published the results of its own independent research, noting: “BTL mortgage competition is showing no signs of stopping, which is great news for landlords looking to build their portfolio. Our research shows that the average two-year fixed BTL mortgage rate has fallen by 0.31% in just one year, and even though the pace of the fall has slowed in recent months… the continued drop is nonetheless welcome.

“The figures also show that the market has now recovered from the significant drop in products that was seen at the start of this year, suggesting that landlords can benefit not only from low rates, but also a higher number of mortgages to choose from.”

More intense competition is certainly helpful for any investors looking to lock in to a good deal while rates are still at their all-time lows. 2 and 5-year deals are now being offered that offer investors considerable confidence that mortgage repayment costs will remain both predictable and manageable.

Changes in September:

While now might be a good time to consider new mortgage products, investors should note that new regulations will come into effect from 30th September. These will require lenders to apply stricter affordability checks on applicants with four or more properties. Previously, lenders of BTL mortgages sought to ascertain an applicant’s ability to pay by demanding proof that rent would cover 125% of proposed mortgage interest payments, assuming a hypothetical interest rate of 5.5%. As of the end of next month, that figure will rise to 145%. Currently, there are major lenders still offering new BTL mortgages according to the old criteria but it remains to be seen how long these will remain available.

Commenting on the changes, Charlotte Nelson, finance expert at moneyfacts.co.uk said: “Given that 89% of the mortgage deals on the market today are available for borrowers with four or more properties in their portfolio, these changes will affect a large chunk of the market.”

Looking ahead:

What is certain for all investors is that good information and advice will remain key to making a success of property. The BTL market itself still offers considerable benefits over conventional savings accounts, and the prospect of steady yields and capital appreciation generally make for a safer, less volatile investment than stocks and shares.

However, not every property deal will be a winner; location is key, so it’s essential to choose the right property in the right area, aimed at the right kinds of tenant. Add to that the importance of choosing the most appropriate financial package and one can quickly appreciate the wisdom of seeking expert professional advice.

If you’d like any information or help with finding a property that’s right for you, please contact one of our advisers today on 01244 343 355 or email info@residential-estates.co.uk

Leave a Reply

Your email address will not be published. Required fields are marked *