Borrowers in the UK are being urged to act quickly after the Bank of England’s decision to raise interest rates.
The decision was announced this week, following the Monetary Policy Committee’s meeting on 1st November, where the committee voted 7-2 to increase rates to 0.5 per cent. This is the first time that the Bank has hiked rates in more than a decade, after the bank lowered rates to a record low of 0.25 per cent last year.
“There remain considerable risks to the outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal,” commented the Bank, in a statement announcing the increase. “The MPC will respond to developments as they occur insofar as they affect the behaviour of households and businesses, and the outlook for inflation.
“Monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years.”
New research from Trussle shows that variable rate mortgage borrowers may have to pay out an extra £83 million this December, as a result of the Bank’s decision. This is because the base rate is used by lenders as their reference point for interest rates on savings accounts and mortgages. The decision to raise rates was made partly in response to inflation hitting a five-year high of 3 per cent, which has already seen people’s household budgets squeezed tighter.
Trussle predicts that most UK lenders will pass the full increase onto their customers within a month, based on historical lender behaviour. In this scenario, the average variable rate borrower on a repayment loan would see their monthly payment rise by £16.56, which amounts to £82.8 million across the UK. On an annual basis, these borrowers will see their mortgage payments increase by £198, or £990 million across the UK.
While most new home loans are on fixed rate terms, there are five million UK borrowers on variable rate products, which move up and down with the base interest rate. A borrower may be on a variable rate because they opted for one when securing their mortgage; a tracker rate, for example, is likely to have been extremely favourable over the last decade. They may also be on a variable rate because their initial fixed rate has lapsed onto their lender’s Standard Variable Rate (SVR). Three million people are currently in this position, mostly because they haven’t switched at the right time.
Those on a variable rate in London, where the average outstanding mortgage value is around £243,000, will be hit hardest by a rate rise. A London-based borrower with 20 years left on their mortgage, currently paying an interest rate of 2.25 per cent, would see annual charges increase by £336.
Ishaan Malhi, CEO and founder of Trussle, says: “While the increase is only likely to be small at first, borrowers on variable rate deals should consider how they’ll cover the extra cost, especially those on a tight budget or with a large outstanding mortgage. With more rate rises potentially on the horizon, those nearing or beyond the end of their initial mortgage term should be thinking about switching to a more competitive deal.”
What does the Bank of England’s interest rate cut mean for UK property?
4th August 2016
The Bank of England has cut interest rates to 0.25 per cent, a record low, following June’s Brexit vote.
The slashing of the base rate from 0.5 per cent is the first cut since 2009 and the lowest that interest rates have ever been in the country. Speaking on 4th August, Bank of England Governor Mark Carney announced that the Bank will also purchase £10 billion of UK corporate bonds and £60 billion of government bonds, in a move to stimulate the economy.
The governor has said that banks have no excuse not to pass on lower costs to customers. Indeed, the Bank has also introduced a £100 billion Term Funding Scheme, which will lend to banks at rates close to the new, lower rate to encourage them to pass on the drop to households and businesses.
What does the new interest rate mean for UK real estate?
For commercial property, the base rate is not expected to have an impact on pricing.
Miles Gibson, Head of UK Research, CBRE, says: “Following the referendum result, the Bank of England made reassuring noises to the market and opted to wait another month to see if conditions improved. The MPC felt it had to take action with today’s cut representing the strongest monetary policy intervention we have seen to date. This week’s weak PMI numbers across all sectors were likely the final nails in the coffin for any members who had hoped to keep the rate at 0.5 per cent.
“From a commercial property perspective, this base rate cut will not have any big impact on pricing, which is driven by long term rates, although pricing might be boosted by a confidence effect from this cut. With sterling priced assets still looking attractive to overseas investors, whose cost of capital is not driven by UK debt markets, London and the UK most definitely remain a strong investment opportunity.”
The news will be a “body blow” to first-time buyers saving up for a deposit on a new home, says Mark Hayward, Managing Director, National Association of Estate Agents, although he highlights the benefit for current homeowners.
“Homeowners with outstanding mortgages are currently enjoying some of the lowest fixed rate mortgages seen for a long while, with lenders battling it out to offer the cheapest deal,” he adds. “Cutting interest rates further is likely to improve confidence among those prospective house-buyers who may have put their search on hold, following the Brexit vote in June.”
The lower rate is good news for developers, notes Ray Withers of Property Frontiers.
“Lower borrowing costs can spur developers on to build more,” he explains. “This in turn creates more opportunities for off plan property investment, so lower interest rates benefit investors too.”
Indeed, it is good news for any investor or buyer funding their property ownership through a variable rate mortgage, which spells favourable conditions for buy-to-let investors.
“The UK continues to have a severe housing shortfall, meaning demand for new homes is set to remain strong for years. Strong demand and an interest rate cut are a great combination for buy-to-let property investors,” adds Withers. “While interest rates have gone down, yields have remained the same, meaning that the buy-to-let profit margin has effectively gone up overnight. Even overseas investors can benefit if they borrow in sterling to fund their UK property purchase.
“Those looking to take out fixed rate mortgages could also benefit from the interest rate cut, as new fixed rate borrowing is likely to be at more competitive rates as a result of the interest rate cut.”
“The other aspect of the rate cut to consider is that investing in UK property is now more attractive when compared with other asset classes,” he continues. “Bonds and savings, for example, could both become less appealing as a result of lower interest rates, so it wouldn’t be surprising to see investors looking to release cash from those asset classes in order to use it for more profitable ventures, like buy-to-let property.”
Photo: James Stringer