Last week, the Bank of England announced it was raising its base rate from 0.5% up to 0.75%. This is only the second base rate rise in a decade, and financial advisors are busy calculating the impact it’s going to have on mortgages, savings and the property market.
As a property investor, you may be wondering if the base rate rise will have any effect on your property portfolio, so let’s consider what is actually going to change.
WILL MORTGAGES GO UP?
First, let’s take a look at mortgages. If you’re already on a fixed rate deal, this is going to have no impact on you.
However, a large number of borrowers have standard variable mortgages that move up and down as the base rate changes. And if you’re on a tracker mortgage that follows any increase in the base rate, an extra 0.25% will add £12 a month to a £100,000 repayment mortgage and £25 to a £200,000 one.
Nationwide reports that it has 400,000 households on its base mortgage rate, which means monthly mortgage payments will increase to £461 from £449 on a £100,000 loan and to £922 from £897 on a £200,000 loan.
WHAT THE EXPERTS SAY
Robert Gardner of Nationwide commented: “Looking further ahead, much will depend on how broader economic conditions evolve, especially in the labour market, but also with respect to interest rates. Subdued economic activity and ongoing pressure on household budgets are likely to continue to exert a modest drag on housing market activity and house price growth this year, though borrowing costs are likely to remain low.”
He estimates an interest rate rise of 0.25% will increase payments by around £16 a month or £192 extra per year on an average variable mortgage.
The credit agency, Experian, calculates that the 0.25% increase will result in a typical borrower on a standard variable rate or tracker mortgage having to find an additional £400 a year. The agency is basing its calculations on a typical SVR deal of 3.99% or a tracker that’s 2% above the base rate on a 20-year mortgage worth £250,000.
David Hollingworth, mortgage expert at L&C Mortgages, said: “Although many borrowers do appear to have looked ahead and have sought to fix their mortgage rate, those that have failed to do anything so far may finally be triggered to revisit their situation. Although rates have been drifting upwards since the run-up to the last rate hike, the fixed rate options are still very competitive. Those most vulnerable to rising rates will be borrowers on their lender’s SVR.”
The good news
The upside to this is that many commentators are saying that when the Bank of England has the confidence to increase its base rate it’s generally a sign of a strengthening UK economy and in no way signals a fall in property values.
In this robust economy, it’s usual for rents to rise as demand for residential properties increases. In these circumstances, if there’s a demand for rentals in your area and you have a well-maintained property, it’s reasonable to increase rents in line with base rate changes.
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