At the beginning of May, the Bank of England interest rate was raised again for the fourth time since December 2021.
These increases started from:
- 0.1% to 0.25% in December 2021
- to 0.5% in February 2022
- to 0.75% in March 2022
- to 1% in May 2022
The Bank of England has warned that inflation could reach 10% in the coming months. If it does, further interest rate rises are expected.
Why have interest rates risen?
The Monetary Policy Committee introduces interest rate rises to try and control inflation.
Inflation measures increases in the cost of living and Consumer Prices Inflation in the UK has climbed to 7% in the past year. This is far higher than predicted and exceeds the 2% target at which the Monetary Policy Committee is expected to keep inflation.
The Monetary Policy Committee has indicated inflation could reach 10% by the end of the year because of more rises in energy costs expected in October. As a result, economists predict interest rates could go to 1.5% or higher.
What does this mean for property investors?
For property investors, the most immediate impact of the interest rate rises will be felt in mortgage rates.
If you have a variable mortgage, you can expect to pay between £20 and £40 more a month on £100,000 and £200,000 mortgages. However, repayments will have increased by a total of approximately £92 per month since the first interest rate hike in December.
According to Zoopla, approximately three-quarters of homeowners are on fixed rate deals, so they won’t be affected until they come to change their mortgage deals. However, approximately 850,000 homeowners currently have a tracker mortgage, while 1.1 million are on a standard variable rate.
Borrowers on standard variable mortgage rates usually have lower outstanding mortgage amounts than average. If you only have a £50,000 outstanding mortgage, the monthly repayments will have gone up by only £23 a month since December.
Will the rate rises be passed on to borrowers?
Current competition in the mortgage market has meant that some lenders haven’t passed on the recent rises in full to their customers.
Zoopla reports standard variable rate mortgages rose on average by 0.37% during December and March, while the bank rate increased by 0.65% in this period. Plus, interest rate rises were expected, and many lenders had already priced these into their fixed rate deals.
At present, an average two-year fixed rate mortgage is around 3.03%, up from the 2.29% in November 2021, prior to the rate rises.
What should property investors do?
If your mortgage is on your lender’s standard variable rate or your fixed rate is coming to an end, you should find a new deal sooner rather than later. On average, the difference between the interest rate on a standard variable mortgage and a fixed rate deal is currently 1.75%.
How long you fix your mortgage rate for will be down to personal circumstances, and you should take into account the overall amount borrowed and over what period. It’s worth noting that the difference between the percentage rate and the length of the fixed rate period has shrunk, and there’s not such a high premium for fixing for a longer time.
If you don’t want to increase your monthly payments, you could consider lengthening the term of your mortgage. However, this will mean you pay more interest over the life of the mortgage.