Interested in Interest?

Posted 24 March 2016 by Neil Moore

There has been much speculation regarding interest rates – they cannot get any lower than they are so the question is, when will they start to rise? With £314m owed in mortgages for properties in the RH12 & RH13 postcodes alone, even the smallest rise could have a big impact so it is a question many people are asking.

It was six years ago that the bank base rate hit 0.5%, an all time record low. If rates now start to rise quickly, then house price growth will start to slow. A sharp increase in interest rates is however unlikely; it is highly probable that rates will start increasing very slowly resulting in property prices continuing to increase (albeit more slowly than perhaps now). If there is too much growth whilst rates are low then there is going to be a much tighter squeeze on affordability as rates start to increase.

The Bank of England is fully aware of these risks. To try and avoid an affordability squeeze if rates rise, they have introduced tighter mortgage regulations; lenders now have strict affordability criteria for borrowers and high loan to income ratios have been capped. The Bank is keeping a careful watch on inflation and have noted that even if rates remain unchanged for more than another year, inflation will still barely rise above its 2% target.

Reports are indicating that interest rates may now not rise early next year as first thought, a rise may not occur until late 2017. It is however, only a matter of time before The Bank of England does start to slowly bring rates up, meaning that time is of the essence to snap up a great mortgage deal – if you like to know exactly what you will be paying each month in terms of mortgage payments there are some cracking longer term fixed rate deals currently available.

Whilst many people are concerned by talk of a rise in interest rates, it is thought that increases will be small and spread over time and with the strong growth in earnings (currently 3.2% pa), the extra interest bill should be affordable for most borrowers not on a fixed rate mortgage.

But what about buy to let mortgages? The Bank of England has noted that these do not have as stringent conditions as residential mortgages – for example, a landlord could borrow 95% at 2% providing that the rental income covers a the mortgage payments by a certain amount. The landlord does not have to provide any affordability information to demonstrate how he could support a 3% increase in the mortgage rate.

However, it is likely that the rental market will stay strong and demand will continue to exceed supply so even when interest rates start to rise and push up mortgage rates, rents will also be rising and should cover increased buy to let mortgage payments. So why is the rental market going to continue to grow?

The UK population is growing – and the Office of National Statistics predicts it will exceed 70 million in the next 12 years. There is strong inward migration to the UK and this is likely to continue. The migrant population tends to rent, at least at first, so the rental market in the South will benefit from this as a point of entry to the UK. The UK also has an expanding birthrate and an ageing population. As the rental population becomes more diverse and the number of families and older couples and singletons who rent increases, demand will continue to exceed supply and the market will remain a strong one.

I firmly believe buy to let is here to stay as a result of the above and if you are thinking of buying a property for rental and would like to discuss this, or if you see a property for sale and would like an opinion on the rental return and investment potential, email me at neilmoore@guyleonard.co.uk or call me on 01403 248222.

 

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