Finance

Property industry reacts to base rate increase

If you hadn't heard already, the Bank of England has voted to increase interest rates for the first time in more than a decade. The rise means the rate has moved from its historic low of 0.25pc to 0.5pc.

Warren Lewis
|
2nd November 2017
BoE

If you hadn't heard already, the Bank of England has voted to increase interest rates for the first time in more than a decade. The rise means the rate has moved from its historic low of 0.25pc to 0.5pc.

BoE Govenor Mark Carney and six other members of the Monetary Policy Committee voted for the rise, with two members voting to keep rates on hold.

Although this was widely expected, the news may come as a shock to an entire generation of mortage holders as it means many will see their monthly payments rise in line.

As ever, the property industry was quick to react to the announcement, here's what thay have been saying....

Russell Quirk, founder and CEO of eMoov.co.uk, commented:  "A fair adjustment to interest rates and one that takes us back to the pre-referendum ‘norm’ of 0.5%. This should do little to phase homeowners and buyers on variable rates with the average homeowner out of pocket an extra £16 or so a month, and water off a duck’s back for those with a fixed rate security blanket.

While the wider economy to some extent has been comatose since the Brexit vote, it has started to show signs of life in terms of manufacturing and employment which should continue to build.

Where the UK property market is concerned, there is certainly no cause for panic as we are unlikely to see any further adjustments too soon down the line and it is very unlikely that we will return to the extraordinary highs of the late 80s, when many fell into a financial black hole.
For UK Property PLC, today's announcement should be met with a distinctly apathetic approach. There's nothing to see here."

Mark Harris, chief executive of mortgage broker SPF Private Clients, says: "The Bank of England’s decision to raise interest rates by a quarter point was widely expected, whether it should have actually happened or not, as the rate setters managed to back themselves into a corner. With five-year Swap rates at 1 per cent, the market forecasts the average position for base rate over the next five years to be at that level, so borrowers do not need to panic, as any rate rises are likely to be slow and moderate. However, there is a whole generation of borrowers who have never known a rate rise so psychologically it could have much more of an impact for them.

The increase has already been factored into mortgage pricing, with most lenders hiking the cost of their fixed-rate deals over the past couple of weeks. However, we don’t believe it is the end of cheap mortgages with Nationwide actually cutting its fixed rates this week, illustrating the ultra-competitiveness of the market. Some lenders may well be prepared to absorb rate increases into their margins, as they are still chasing business. The plethora of new lenders has also led to increased competition in the mortgage market, which is good news for borrowers.

As always, independent advice is crucial, particularly if you are on a variable-rate deal and worried about rates rising further."

Jeremy Leaf, north London estate agent and a former RICS chairman, says: "Although the change is very small, it could have a disproportionate impact on many, especially first-time buyers and sellers, who have told us they have high loan-to-value mortgages and/or other loans. The direction of travel for interest rates will have a bearing on future plans. Inflation rising faster than salaries is also adding to the pressure on household finances.

It’s not the increase itself but the impact on buyer confidence and a property market already compromised by political and economic uncertainty, which is more relevant.

On the other hand, the impact on the wider market may be more limited now bearing in mind the higher proportion of homeowners with fixed-rate mortgages and/or those who have built up substantial equity from previous house price rises."

Jonathan Harris, director of mortgage broker Anderson Harris, says: "There are two camps - the first is made up of older, more experienced borrowers who won’t be taken aback by a rate rise, even if it is the first in a decade, as it is only taking us back to pre-Brexit levels. Then you have the newer borrowers who have never known a rate rise and will be spooked. It may make them question their spending and they will be worried as to how far they might go. However, they do not need to panic as forecasts suggest that rates will rise slowly.

The trend recently has been to opt for fixed rates and this won’t change. A rate rise will encourage more people to remortgage, as there is nothing like higher monthly mortgage payments to really focus the mind. There may be some borrowers who believe they are mortgage prisoners, unable to mortgage, but it is worth checking whether that is the case, particularly if you are on your lender’s standard variable rate and paying over the odds."

Emmanuel Lumineau, CEO at BrickVest, said: “Today’s announcement is momentous for the UK economy and should signal the start of a series of gradual increases. The Bank of England has decided that inflation is potentially getting out of control and the economy now requires higher borrowing costs. The decision also signals that the UK economy has not performed as weakly as the Bank predicted last year.

Increasing interest rates has a direct impact on real estate. Higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices. There has certainly been an abundance of international capital flowing into real estate, almost every major institutional investor globally has been increasing their portfolio allocation to real estate over the last five years mainly because of lack of alternatives.

We continue to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long-term office space requirements. If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market. Indeed our recent research showed that 34% of institutional investors believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months.”

Jason Neale, Magellan Homeloans - Sales Director, said: “The rate increase is hardly a bolt out of the blue, and probably the most hotly anticipated anti-climax of the year, because the Bank has been dropping hints about this for months.

Do I agree with the decision?  Yes, I do actually, because I think it will be good for the country.  Hopefully it’ll put pressure on the high street banks to rein in the amount of cheap cash they’ve been dishing out to consumers, which has created the gargantuan mountain of unsecured debt we have today.

But come on, let’s be realistic, a quarter point rate hike is hardly going to set the world on fire.  Although tracker mortgage rates will go up most middle to higher income homeowners will hardly notice.  Same with savings rates, any increases will be microscopic.

I think we’ll see an increase in the number of homeowners either needing or wanting to remortgage, especially those who’ve racked up a load of unsecured debt they can’t pay back.  This is where specialist lenders, Magellan included, stand head and shoulders above high street lenders.  We exist to help borrowers marginalised by the mainstream.”

John Goodall, CEO and co-founder of buy to let specialist Landbay said: “The first rate rise in a decade could fire the starting gun for an increase in residential rents. Landlords have had to face a catalogue of challenges over the past couple of years, from stricter regulation, reductions to tax relief, and a significant stamp duty tax hike when buying a buy-to-let property. Many expected these would be passed on to tenants, but low mortgage rates have enabled landlords to absorb much of these costs, especially those that are wary of tenants facing negative net wage growth, so a base rate rise could make all the difference.

Whether tenants are renting as a stepping stone on the way to home ownership – or in some cases choosing to rent for life – this generation are relying on a well-served buy-to-let market to ensure rental growth doesn’t become unbearable. What is now needed is some firm Government commitment to improving standards, affordability and supply of rental properties. Fast approaching, this month’s Autumn Budget will be a chance for the Chancellor to reassure the industry on its plan for tackling this growing demand for housing.”

Paul Smith, CEO of estate agent, haart, comments : “This rise was predicted and as such we don’t believe it will impact the housing market at all. When you consider interest rates have historically been several percentage points higher, this very small increment should not affect anyone who has borrowed sensibly.

With more stringent borrowing criteria in place we do not see very small increases in interest rates as being a significant impediment to the market. But this rise does show that rates could nudge up in future.

A far bigger threat to the stability and health of the housing market is the punitive levels of stamp duty which the Chancellor should address as a top priority in his budget later this month.”

Liz Syms, CEO of Connect for Intermediaries, says “The MPC has perhaps unsurprisingly increased rates to 0.5%.  This is however another hit for landlords especially, as they have already been affected by so many other measures recently.  Brokers will come into their own in the next few weeks as there will never have been a more important time for brokers to get in touch with their clients to help them to mitigate against these rises and other costs. While some lenders will pass on the rises straight away, mortgage rates are still at historic lows, so if ever there has been a time to remortgage it is now, especially for those on variable rates. Helping landlords to consider other ideas such as other types of properties that can increase returns such as HMOs, can also be a valuable offering from the broker to help the landlord offset the effect of the base rate rise.”

Richard Pike, Phoebus Software sales and marketing director, says “It may be the first rate rise in ten years, but the reality of the MPC’s decision today is that rates are back up to the same level they were in August 2016.  We are not yet in the realm of five percent, or more, as many people still remember.  This relatively small increase will have some impact of course, but then you also have to look at the ways in which it may help the economy.  On one hand you have to pay more for your mortgage, but on the other the pound in your pocket is likely to be worth more and go further; if it does what the bank intends and brings inflation down.

It may be too late to have any effect on Christmas goods already in the shops, but for our everyday expenses the difference could negate the extra on mortgage payments in the long term.”

Doug Crawford, CEO of My Home Move, comments: “Although this is the first rate rise by the Bank of England in a decade, mortgage holders should be encouraged to remember that 0.5% is still a historically low rate and is simply a return to the rate that was in place in July 2016. For people saving a deposit to purchase a home, the rate rise should be welcomed news, as they should see a slightly better return on their savings.

For the housing market, the developments and risk controls that Lenders have in place will continue to protect investment in housing and ensure that the market remains stable for the foreseeable future.

As always, Banks and Building Societies will continue to offer their new and existing customers highly competitive rates and brokers will continue to find their customers the best deal for them. When taking out a mortgage borrowers should always think long-term when finding the best deal for them, taking into account possible rate rises and the financial implications this could have. As an industry we need to ensure that consumers have all the information they need to make an informed choice about which mortgage deal is best for them.”

Nick Leeming, Chairman at Jackson-Stops, comments on today’s interest rate decision: “Today’s moderate interest rate rise is unlikely to disturb the housing market. Good things don’t usually last forever and the end of this golden period of great mortgage deals won’t be a surprise to the vast majority of prospective and current homeowners. The market remained fairly stable throughout the General Election and the EU referendum so it would be surprising to see activity levels or house prices fall as a result of such a modest change to interest rates.

Traditionally, higher interest rates mean higher mortgage rates so we may see those already on the fence about moving house take a ‘remain and renovate’ approach instead. However, this hesitance will not be down to interest rates alone. Over the last year punitive stamp duty levels have been a real drag on the property market and will continue to be unless Philip Hammond announces stamp duty reform across all transfer values in the upcoming Budget. The combination of stamp duty, high moving costs, economic uncertainty and potential further interest rates rises, will represent a major barrier to home ownership. If the rumoured first-time buyer stamp duty holiday does come into play it will be a significant boon for this demographic.”

Paula Higgins, chief executive, Homeowners Alliance, reacted: "For all the fanfare and furore, we must remember this rate rise only takes the interest rate up to 0.5% - still incredibly low when you consider the rates of yesteryear.

That being said, as the Financial Conduct Authority’s recent survey revealed, a small increase in mortgage repayments can have a big impact on household finances. Furthermore many lenders have already reacted to this by pulling their best rates. It’s still difficult for first time buyers to get on the housing ladder thanks to tightened criteria and the fact high LTV mortgages cost so much more than those around the 75% LTV mark. Lenders withdrawing their cheapest products is just another blow to aspiring homeowners and seems an unnecessarily drastic response to such a minimal increase.

For existing homeowners the race to remortgage is really on. Speak to a fee-free mortgage broker to ensure you're on the best deal available now to protect you from future rises over the coming year."

Simon Gammon, Managing Partner, Knight Frank Finance: “We are witnessing the Bank of England raising their base rate for first time in a decade. It has been a long 10 years since the base rate last went up, so today represents the first time many UK borrowers will have ever experienced an increase in their mortgage payments. The 0.25% lift in the base rate will likely be passed on to borrowers on variable rate mortgage deals almost immediately – with a material effect. Although the base rate is still just 0.5%, this quarter point increase translates into an extra £250 a year in interest for every £100,000 of borrowing. Someone therefore with a £500,000 mortgage will be paying more than £100 extra in interest every month. Only those on a fixed rate deal are likely to avoid some sort of increase.

The question is, does this rate rise signal the start of a series of future base rate increases? While it could be actioned over a long period of time, is the country finally starting to move towards a normalisation of the base rate away from ultra-low levels? Libor and swap rates, the money market rates which determine fixed-rate pricing had risen in anticipation of the rate rise, and this may continue if further rises are anticipated.

As mortgage lenders adjust to this new landscape, home loan deals are likely be launched and withdrawn at a rapid pace. In a rising rate environment we can expect the mortgage market to become more volatile for a while. Mortgage lenders, keen to meet their lending targets, will continue to play with rates to ensure they are in the best-buy tables, resulting in some ‘jostling’ in the market. When rates are being launched and withdrawn so quickly, borrowers will want to make sure they have access to the most up-to-date information to enhance their opportunity of getting the best deals.

The argument for taking a fixed rate, is ever stronger. Borrowers who spot a good mortgage deal in the coming months should grab it.”

James Roberts, Chief Economist, Knight Frank: “An increase in the base rate is often viewed with trepidation by the property industry, but this long expected move is unlikely to have a negative impact. I expect the Bank of England will follow the same strategy as the US Fed, and gently apply the brakes while giving lots of advance warning, in order to balance the competing pressures of normalising rates while not derailing growth.

Consequently, I see a gradual rise ahead, partly to stockpile some future rate cuts should the MPC need to combat another downturn at a later date. Also, the Bank of England is showing some younger homeowners that rates do actually rise, given how long it has been since the country saw an increase - the last UK rate hike in 2007 came a few days after the first iPhones went on sale.

For commercial property, it should be remembered that debt has played far less of a role in the market in recent years than was the case prior to the financial crisis. Commercial property yields are not strongly correlated to interest rates, so I do not see a small rate increase having much of an impact. Indeed, in some markets the re-emergence of rental growth, such as for offices in districts popular with technology firms, should keep investors active.”

 Grainne Gilmore, Partner, Head of UK Residential Research, Knight Frank: “The first increase in the base rate in a decade is a notable event, especially as there is a feeling that this may be the first step in a series of rate rises. However, seen in isolation, this quarter-point rate rise only reverses the cut seen last year, and the base rate is still at a historic low. Even if there are two more rate rises in the next year or so, the base rate will still be at a notably lower rate than seen in any other period of history since the Bank records started in 1690.

Some mortgage holders will see their repayments affected by the change in rates, and mortgage rates on new home loans will rise, but in terms of the residential market, the move is unlikely to have an impact on overall pricing, although some rents may edge up if buy-to-let landlords affected by the change pass on their increased costs to tenants.

However, if there is another rate rise in the coming months, confirming the country’s move into a rate rise environment, this may have a wider  effect on sentiment in the market.”

Andrew Ellinas, Director, Sandfords: “Inflation has been creeping up and The Bank of England’s Monetary Policy Committee has increased interest rates to 0.5% to compensate, despite the annual growth rate being at its weakest for four years.

A 0.25% rise is not going to have a significant impact on the economy as a whole, but it will further depress a falling property market, particularly in prime central London. Currently, the market is flat.  As an example, there are two blocks of apartments near our Regent’s Park office that are historically very sought-after and if a property came available we would be swamped with buyers and a sale would be made very quickly.  In one of those blocks, in the same month in 2016 there were three apartments on the market and they all sold. This year, there are ten apartments currently available but there are no buyers for them.  In the other block, a very similar situation, there was one property on the market in 2016 and in 2017 there are ten that are not selling.

There are two main reasons for this. The first is that they are overpriced. Vendors still believe that values are what they were two years ago. I called the top of the market just over a couple of years ago and it has been drifting down ever since, with a bit more yet to go.  With so many tax changes (increased stamp duty, an extra tax for buy-to-let investors and foreign investors’ tax) and Brexit looming, there is too much uncertainty and buyers, particularly overseas investors, have been put off making big financial commitments.

The government is being urged to abolish stamp duty ahead of the budget. Undoubtedly, this would be the best thing to happen to the property market. London is the driving force for every market and scrapping this tax would provide buyers with an incentive to start moving again.”

Mark Dyason, Managing Director, Thistle Finance: "While it could be a while before we see another increase, the first rate rise in a decade is the perfect time for everyone with debt to review their exposure and consider their options.
 
People with debt should take pre-emptive action to ensure long-term affordability and review their ability to keep up repayments. The cheapest mortgage rates ever seen are now starting to disappear, so if anyone is considering remortgaging they might want to act, and soon.
 
In the months ahead we are likely to see more and more households consolidate the debts they have taken on, either through a remortgage or, if that is not appropriate or possible, a secured loan.
 
Thankfully, as well as having competitive rates, many secured loans today have no early repayment charges, making them a genuine alternative for people looking to take control of their finances at a time of rising interest rates."

Lea Karasavvas, managing director of Prolific Mortgage Finance, said:  “Mark Carney has handed a generation of borrowers, who have never experienced a rate rise, the fright of their life. But if he hadn’t, Halloween would have been only the second scariest event of the week.
 
The Bank faced a terrifying loss of confidence if it balked again, after one of the most hyped run-ups to a rates decision in history.
 
The market, convinced it was coming, had already voted with its feet. The pound had climbed, swap rates had risen and every lender bar Nationwide had increased interest rates in anticipation. Historically, inflation of 3% has been the magic number to trigger rises and this has been borne out again.
 
Homeowners knew the writing was on the wall. We normally expect fairly equal numbers of remortgages compared with new purchases, but we saw remortgaging running at 90% of all mortgage activity in October.
 
That represents a massive flight to safety for those already on the housing ladder and not a hugely encouraging vote of confidence on the demand side.
 
Consumer confidence fell last month so I expect we’re going to see this kind of sentiment continue to filter through the broader economy.”

Danny Waters, CEO of Enra, commented: “A rise in interest rates has been on the cards for a while now, so it’s no surprise to see the Bank of England implement one today. Its likely brokers and lenders would have already factored a base rate rise into their plans, and after months of seeing lenders slash their rates, we may start to see them increasing again in the coming weeks.

“The specialist lending sector in particular is in a good position to deal with any effects of the Bank of England’s decision. Bridging finance remains competitive and there is still plenty of scope for continued market growth, as small property businesses use it to finance those projects that are better suited to the flexibility of bridging than other financing. For second charge mortgages, with unsecured consumer debt having expanded again recently, interest rate rises are likely to drive more consumers to cut their debt costs by securing against property, thereby enhancing the healthy growth we have seen in second charge lending this year.”

Uma Rajah, CEO of CapitalRise: "The Bank of England’s decision to raise its base rate of interest today from 0.25 per cent to 0.5 per cent might superficially look like good news for savers, who have had to live with near non-existent returns on their deposits for some time. But in reality it is highly unlikely that banks will actually pass on much — if any — of the rate rise to their customers. It’s more likely they will act to increase their margins, focusing on improving their own profitability rather than doing what’s best for customers. Savers should take note and look for alternative, more lucrative, ways to grow their pot with minimal additional risk. While the base rate will continue to rise over the next 12 to 18 months, it could be some time before banks pass on the benefits.

Meanwhile, the rate rise is bad news for property developers and borrowers that are using banks to finance their loans. Banks charge based on a margin to LIBOR, which will go up in line with the base rate rises. Combine this with other longstanding challenges in securing finance from banks for real estate projects in the current climate, and property borrowers will be much better off looking at more innovative sources that can deliver finance more quickly and offer better value — particularly if the rate continues to rise over the next 12 to 18 months."

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