UK interest rate rise: What it means for property investors

In December, the Bank of England (BoE) announced a rise in interest rates for the first time in over three years to combat the increasing cost of living caused by inflation. The BoE raised the base rate to 0.25% from a historic low of 0.1%.

With inflation at its highest rate in a decade at 5.1%, BoE governor Andrew Bailey said that action needed to take place to tackle ‘inflationary pressures’ building up in the economy. The BoE’s decision to increase mortgage rates will increase mortgage costs for some homeowners and property investors.

However, in reality, despite the rise in the cost of borrowing, those who wish to fund their property investment with a mortgage should note that rates remain at an exceptionally low rate.

In this feature, Surrenden Invest looks at the history of interest rates in the UK and what the latest rise means for investors.

What is the current interest rate in the UK?

The UK interest rate has been increased to 0.25% to combat a surge in inflation. Those keeping a close eye on the cost of borrowing will note that the Bank of England’s latest increase remains below interest rates before the first lockdown in 2020.

In response to the coronavirus outbreak back in March 2020, the Bank of England confirmed an emergency cut in the benchmark interest rate, from 0.75% to 0.25%, to lower borrowing costs to stimulate the economy and protect it from the worst effects of the health crisis.

With a record-low emergency interest rate of 0.1% introduced during uncertain times, it was inevitable that the central bank would introduce incremental rises. Those looking to fund their property investment with a buy to let mortgage remain in a favourable position to borrow money at a low rate.

UK interest rates history

Over the last ten years, one of the most encouraging aspects of the UK property market has been the low interest rate environment for borrowers. Following the financial downturn and recession of 2008, interest rates have been historically low since the Bank of England’s decision to significantly lower the base rate from 5.75% in July 2007 to 0.5% by April 2009.

According to Halifax figures, house values at the start of the 2008 recession plummeted by an average of 16.2% across 12 months. With people losing confidence in the housing market, this moment in time marked a monumental change to the future of the UK’s private rental sector.

In 2008, the appeal of buy to let property increased, as investors started to see the value in investing in rental property by taking advantage of the low cost of borrowing. Between 2009 and 2016, interest rates remained at 0.5%. During this time, average house prices increased from £158,004 in May 2009 to £209,000 in April 2016.

Following the UK’s decision to leave the EU, the Bank of England cut interest rates to 0.25% from 0.5%, warning high-street lenders to pass on cheaper borrowing costs to customers in a bid to prevent a post-Brexit recession. At the time, the rate was considered an ‘all-time low’. As the UK navigated its way through Brexit negotiations, two gradual increases were introduced between August 2016 and November 2017, bringing it to 0.75% at the start of 2020.

On March 11th 2020, the Bank of England responded to the pandemic by cutting interest rates to 0.1%, which remained in place until December 2021, when rates increased to 0.25%. Historically speaking, borrowing remains cheap for those buying or investing in a property in the UK. While there is inevitably clear scope for interest rates to increase in the future, buy to let mortgage borrowers will still be able to access excellent deals.

Rising interest rates effect on real estate

Given the competitively low rates still available, landlords and investors with a portfolio of properties that have taken on a lot of mortgage debt are likely to witness a relatively small climb in repayments. Looking at the property sector, investors who wish to secure a property with a buy to let mortgage are in a fantastic position to benefit from a low cost of borrowing and a strong 5-year market forecast.

According to the latest Savills outlook, average UK property values stand to climb by 13.1%% over the next five years. For buyers looking for the best capital gains, housing in regional property hotspots in the North of England and London’s commuter belt are set to see the most significant uplift in values. Investors looking to invest in property in 2022 should be reassured by rising property values and lender competition will inevitably keep levels down.

Are interest rates higher on investment property?

When it comes to investing in property with a mortgage, property investors should be aware that interest rates could rise in the future, albeit at a slow pace. Buy to let (BTL) mortgages are designed for property investors and landlords who want to buy a property with the sole purpose to rent it out. Although most of the regulations around BTL mortgages are similar to more traditional mortgage products, there are some noticeable differences.

The cost of borrowing is one of the critical differences for BTL investors. With interest rates generally higher on investment property, borrowers should shop around to get the best deal. Fees and minimum deposits also tend to be higher for a BTL mortgage.

As most buy to let mortgages tend to be on an interest-only basis, investors should also consider whether they wish to enter an interest-only or a repayment model basis. For more information about the mortgage options available to you, contact Surrenden Invest, and a member of our team will be happy to recommend a trusted mortgage broker.

In the meantime, to help determine how much you could borrow to fund your next buy to let property purchase, this mortgage calculator will do the hard work for you.

Will interest rates go up in 2022?

Over the last ten years, UK interest rates have remained at record-low levels, with rates remaining below the 1% since 2009. For those planning ahead, most forecasts assume that the Bank of England will raise rates at a slow and steady pace.

Savills expects that throughout its 5-year house price forecast, interest rates will reach 1.5% at the end of 2026 before plateauing at 1.75% at the end of 2027. Given that the BoE raised rates at the end of 2021 to 0.5%, should interest rates go up in 2022, they likely won’t increase past the 0.75% rate that was in place before the beginning of the pandemic

Investors who act quickly will see the most benefits from the low rates. With fixed-rate mortgage options available, buyers could lock in a low rate for two to five years (seek independent advice to determine if this is the right strategy for you).

Ultimately, property located in established markets like the UK is viewed by many as a ‘safe haven’ asset. Despite interest rate rises, the strong appeal of rising rents and capital gains makes buy to let investment an opportunity that is certainly worth paying attention to.