Investments and the Bank of England

September 25, 2023

Despite the fact that 80% of investors had forecast an interest rate rise before the announcement last week, the Bank of England held its rate steady at 5.25%, and it’s encouraging news for the property market.

Many industry insiders are hopeful that the latest news could indicate the dawn of a new era when it comes to borrowing rates, which can have a positive impact on housing market activity. After 14 consecutive base rate hikes since the end of 2021, this is the first time that the Bank of England has decided to pause and maintain the existing rate.

Ahead of its decision, lenders had already been racing to offer borrowers lower and lower rates in recent weeks, demonstrating that confidence was already growing in the UK housing market. We can now see a few sub-5% mortgage deals on the market for the first time in a number of months, and one lender has even brought out a sub-4% deal for buy-to-let landlords.

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What does all this mean for my property investment?

Recently, there has been an increase in the number of cash buyers in the UK housing market, particularly since borrowing rates have climbed. At the same time, the number of overseas buyers honing in on UK property has increased, and this buyer type often uses cash for their purchases. If you are a cash buyer, or an investor with a very low loan to value (LTV) ratio, the interest rate hikes will not have had much of an impact on your monthly returns, and research shows that cash investors are likely to secure hefty discounts compared with mortgaged buyers.

At the same time, rents have continued to rise month-on-month across most parts of the UK, and are now an average of 5.5% higher than they were a year ago. This increase will have gone some way towards alleviating the rising cost of borrowing, and rental demand remains extremely strong in some of the UK’s key tenant locations, such as Manchester, Birmingham and Liverpool.

At this point, it is impossible to say whether peak interest rates are now behind us, but the Bank of England’s decision to not raise its rate this time, alongside better than expected inflation results also announced last week, is leading many in the industry to presume that rates will not rise again. For property investors whose fixed rates are about to come to an end, you will find a much wider range of choice and lower rates right now than you would have done a few months ago.

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Options for mortgage holders

If your fixed rate buy-to-let mortgage is coming to an end soon, and your costs are going to be significantly higher than they have been, there are things you can do to mitigate this. Where possible, many experts are advising mortgage holders to overpay when they can in order to reduce the amount of capital you are paying interest on. As savings rates have also gone up, you could put money into a high-interest account in order to make it work harder, and then use this to help with mortgage payments.

Many buy-to-let landlords also hold interest-only mortgages, meaning that you are only paying off the interest each month rather than chipping away at the amount you have borrowed. This is popular because it not only makes your monthly mortgage payments much cheaper, but many investors use property as part of their retirement plan, meaning they can sell the property when they wish to release their wealth, paying off the mortgage and making a profit through capital appreciation.

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Mortgage rates should continue to fall

Many brokers are now forecasting that lenders will continue to bring their rates down in the near future, making your borrowing costs even cheaper. You can still secure a new mortgage deal six months ahead of time, and then switch to a cheaper rate at no extra cost if one becomes available, so mortgage holders are being urged to keep a close eye on the market.

Aaron Strutt from Trinity Financial commented: "I expect more lenders will lower their fixed mortgage deals over the coming weeks. Mortgage rates need to be closer to 4% to bring more confidence back to the market.

"There certainly is not a full-on price war at the moment, but rates are coming down as the cost of funding mortgages falls."

James Forrester, managing director of Barrows and Forrester, also said of the rate cuts: “Good news for borrowers and today’s decision will bring about a notable boost to an otherwise uncertain housing market.

“We’ve already seen signs that mortgage rates are falling this week, driven by a reduction in swap rates and this could well be the peak, with rates set to reduce from here on out.”