On the 4th of November, the Bank of England monetary commission voted to maintain the UK interest rate at its historical low of 0.1%. It was reduced to this level as the Coronavirus pandemic initially gripped the nation in March 2020 and has remained there ever since. Industry experts are widely predicting the rates will be increased when the committee next convenes on the 16th of December.
So, what does this mean?
The UK press have been covering this extensively in recent weeks and depending on your chosen media outlet, the views will vary significantly.
For instance, readers of more respected reporting etc will benefit from reading informative and balanced views from respected industry experts. If your preferred choice is to browse the more mainstream/tabloid sites for your information, you would be forgiven for believing the end of the world is nigh!
So, with this in mind, it is worth adding some semblance of balance to our thought process with the overwhelming message being that we should certainly not need to panic.
Before assessing what could happen, let us take a brief trip back in time to see what has happened previously.
Recent times – historic lows
Ask an early 1990’s homeowner about mortgage interest rates and you are highly likely to witness the colour drain from their face along with anecdotes of friends and family who lost their homes as rates soared as high as 15%.
Let’s put that in some perspective.
25 Year Mortgage
£376 per month
25 Year Mortgage
£1280 per month
Bases on a £100,000 mortgage the difference is significant but these levels are extreme to say the least. Once again, we do not need to panic!
With interest rates not having exceeded 1% since Jan 09, let us have a look at the interest rate history over the past decade or so:
- The initial reduction in rates was instigated after the 2008 financial crisis. Rates came down to lows of 0.5% from c.5% with a view to supporting the damaged economy.
- Rates stayed at this level until August 2016 when they were reduced to 0.25% following the Brexit vote.
- There was an assumption which turned out to incorrect that rates would be increased in 2015 but with inflation turning negative at the same time, rates were left unchanged.
- Brexit was seen to be a key influencer with many news outlets focusing on the negatives (as they tend to do) with a significant downturn in house prices predicted. This simply did not happen and in fact the opposite occurred with prices increasing and interest rates staying low.
- November 2017 saw the first increase in rates in nearly a decade and a further rate hike followed in August 2018 setting a new level of 0.75%.
- Stability followed once more until the aforementioned covid crisis arrived and rate reductions were applied, ultimately leading us today’s rate of 0.1%.
So, in essence, we have been living in a world where interest rates have been at unprecedented lows resulting in additional cash flow for many.
From a more global perspective, the recovery post 2008 has been a success and the UK property market has benefitted in many ways. The UK has seen huge injections of capital funding regeneration across many major cities with enhancements in build quality and the overall aesthetic of the construction.
So, that’s the past, but what about the future? Before we assess what may happen with rates, we need to discuss a word that you will hear a lot about during 2022.
Inflation – what is happening?
The word “inflation” will be an extremely popular term over the coming weeks and months as it will play a vital role in depicting what happens with interest rates per se.
Put simply, “inflation” is the rate at which we pay for things is rising. Higher inflation results in a higher cost for goods and tends to affect those on lower fixed incomes more.
Even more simply put, if we have too much money to pay for too little goods and services, then prices will inevitably rise. Supply and Demand in its barest form. Covid and to an extent Brexit are major components here as manufacturing output (particularly in Asia) is struggling and this will impact severely the availability of goods on a global basis. Add in significant hikes in fuel and shipping cost to the mix and, voila, inflation will rise.
This is what is happening right now, and we will notice it in our lives, have a look at petrol prices for a start!
As a further UK example, try and have a word with your local builder/contractor and see if you can book them in for any work on your property and you will undoubtedly be told two things; 1. You may be waiting for a long time to secure their services and 2. It’s going to cost a whole lot more than twelve months ago.
This clearly cannot continue and there is a tipping point that will occur.
The future – what could happen?
During the latest MPC meeting, the rising inflation rates were discussed with the consensus agreeing that interest rates may need to rise to assist with the lowering of inflation to the ongoing 2% target. Immediate steps were not taken but it seems widely accepted now that is only a matter of time with many experts anticipating a 0.5% increase in rates over the next twelve months.
So, yes, rates are likely to go up but what will this actually mean?
Whilst the reality in its purest sense will mean homeowners in the UK will potentially see an increase in their monthly mortgage payments, we really do need to apply a common-sense filter and look at the cold hard facts.
Rates are low, in fact, they are incredibly low. Any increase that occurs, i.e., the predicted 0.5% rise over the next twelve months is not going to cause too much impact and many of us will have already fixed our rates anyway. If not, do so.
If we allow ourselves to put on our investor hats for a moment, we need to appreciate and understand the following:
- Even with an increase of 0.5-1.5% over the coming 2-3 years, interest rates will still be at incredibly low levels.
- Any increase in interest rates will tend to affect the first-time buyer market as their affordability margins will be stretched by mortgage lenders. A longer spell in rented accommodation will be the result for many. Bad news for first-time buyers but good news for landlords.
- Regardless of interest rate levels, the shortage in UK housing still applies. The rental market will continue to be highly active.
As mentioned at the beginning of the blog, we simply do not need to panic. The UK property market is one of the most robust across the globe and has withstood far more pressure from extenuating circumstances in the past. As an asset class, it represents excellent value for any mid to long term investor and the underlying fundamentals have not changed.
Shortage of housing allied with a significantly higher first-time buyer age will see individuals, couples and families continuing to rely on the rental market for longer. This is all investors need to hear.
Yes, you will need to speak to your broker and assess your mortgage options as you can still secure incredibly low rates and fix for two, three or five years. Remember also, rental figures are rising in many areas across the country so this is great news to offset any small rises in interest rates. A good article here discusses this very subject.
As always, receiving good counsel remains necessary for all investors so speak to your trusted agent, please liaise with your letting agent and book that mortgage appointment today and not tomorrow.
Please feel free to get in touch to discuss any of the areas we have discussed above. If you need assistance with mortgages, we can point you in the right direction.
We look forward to hearing from you.