Landlords

What are the implications of a base rate rise for buy-to-let landlords?

Commercial Trust Limited -
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1st November 2017

The press would have you believe that a Bank of England base rate rise is an inevitability on November 2nd, when the Monetary Policy Committee reconvenes.

Certainly the revelation in mid-October, that inflation had hit the 3% mark, seemed to intensify rumours that a rates rise is imminent.

That train of thought has been fuelled, in part, by the Bank of England, which on the one hand is trying to keep inflation at around the 2% mark, but on the other has suggested that rising inflation is one of the strongest drivers for a base rate increase.

But what are the implications for those with buy-to-let mortgages?

There hasn’t been a rates rise in a decade, so a whole generation of home buyers and landlords have to this point been immune to the consequences.
In 2016, following the UK public vote to leave the European Union, the base rate reduced to 0.25%, having remained at 0.50% since March 2009.
If interest rates go up in order to counter inflation, anyone looking to apply for a new mortgage, is likely to find that they have to pay more interest than they would have if they had applied before the interest hike. For many other existing mortgage borrowers who are not protected by a fixed rate deal, monthly payments could go up.

For those on a tracker rate the rate will automatically increase and it is almost inevitable that the same will happen for those on a variable rate.
For buy-to-let landlords with an existing mortgage, unless you are locked into an existing fixed rate, a mortgage rate increase from the lender may result in more expensive monthly mortgage repayments.

At a time when inflation is already hitting the consumer in the pocket, a hike in interest rates could therefore potentially serve as a double whammy, with no guarantees that there won’t be further rates rises in the future too.

Of course there is the saying that you must take the rough with the smooth – and because the base rate has remained at its lowest historical rate for seven years, mortgage rates have helped to make home ownership a more affordable prospect, with lower repayment figures than prior generations had to meet.

At the time of writing, we have no way of being 100% certain that a base rate rise will definitely happen on November 2nd.
However, in anticipation of a likely increase, many mortgage lenders have begun to increase mortgage rates on residential products, as have some buy to let lenders, whilst others have in fact dropped their rates.

The window of opportunity created by competition, has seen unprecedented low rates for borrowing to buy property. This “golden” era may be coming to an end.

For many landlords, now is a time to re-evaluate and to consider their options.

From an affordability angle, what impact will a rates rise have on monthly repayments? Will you have to increase the rent that tenants pay, in order to meet these increased costs?

Is now the time to consider remortgaging and taking advantage of the current low market rates with a longer-term fixed rate product, in case these products become more expensive?

More expensive mortgages could have a detrimental effect on home buyer demand and affordability could be pushed further beyond the reach of many people. That in turn could affect house price growth – or capital growth, a valuable source of return for the buy-to-let investor.

For many private rental sector landlords with an existing mortgage commitment, now might be a good time to discuss your circumstances and options with a specialist buy-to-let broker.

At Commercial Trust Limited, we work with a wide range of lenders, keeping abreast of rates changes but also the finer points of the rental market. We welcome any calls from anyone with an existing buy-to-let mortgage or thinking of becoming a landlord, who is not sure how a rates rise might impact on them.

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