What property investors need to know about interest rate changes

interest rate changes

Property investors must always keep a keen eye on interest rates. From bridging loans to mortgages, the Bank of England’s base rate can affect lenders’ products and the repayments that investors must make. In recent years, the Bank of England (BoE) has kept interest rates at historic lows. But this comes in stark contrast to previous decades.


A (quick) interest rate timeline

For much of the 1980s, for example, interest rates hovered above or close to 10%. Through the 90s, they fluctuated between 5% and 7%. Yet, in the 21st Century, the base rate has gradually fallen.

In 2007, the official BoE base rate was around 5%. Then came the global financial crisis. By March 2009, it had been slashed to 0.5%, where it stayed until August 2016.

The EU referendum in June 2016, and the pro-Brexit outcome, prompted the BoE to cut rates further to 0.25%. Whilst they were starting to creep up again throughout 2018 and 2019, the emergence of Covid-19 brought interest rates crashing down to a historic low of 0.1% in March 2020.

Source: Bank of England

There are signs, though, that the next chapter in the interest rate story has begun. On 16 December 2021, the BoE decided to increase the base rate to 0.25%. This means the coming year could see further movements.

Why are interest rates going up?

Interest rates can be complicated. Set by central banks around the world, they are typically used to control inflation. Whether interest rates are high or low will encourage consumers, investors and businesses to either save, borrow or spend.

In the UK, inflation has been rising sharply throughout 2021. It jumped to 5.1% in November as a result of increasing petrol prices and supply chain issues. This was higher than had been forecast. The rate of inflation is predicted to increase further next year, particularly come April, when a price cap on gas bills is expected to be lifted by the energy regulator Ofgem.

Still, many economists expected the BoE to sit tight as a result of uncertainty surrounding the new Omicron variant. But instead, the BoE became the first major central bank to raise interest rates since Covid-19 struck.

“The Bank is choosing to act on what it knows about inflation, rather than hold back on what it doesn’t know about Omicron,” said the BBC’s economic editor, Faisal Islam.

Source: BBC

What must property investors consider?

With interest rates higher, and speculation that further increases will come into effect in 2022, property investors must consider how it affects them.

Many mortgages and loans ‘track’ the BoE base rate. So, when the rate goes up, so does the amount of interest the borrower must pay back. For many property investors, the 0.15% uptick in interest rates will mean higher repayments, if only by around £10 or £20 per month.

Ultimately, most financial products will, in some way, be linked to key economic indicators like interest rates. As such, investors and brokers will need to keep a careful eye on how lenders adapt their products in light of BoE changes.

Bridging loans for property investment will likely remain popular in 2022. As a more fluid, flexible product, bridging lenders can adapt more quickly to economic trends, like interest rates. We will continue to work closely with brokers and clients to ensure they get the best possible bridging loan or buy-to-let product to fit their needs.

Will house prices be affected?

The other key question surrounds house prices. The theory goes: if interest rates go up, some prospective buyers may choose not to borrow. Demand would decline, and house price growth might be affected.

However, the pandemic has underlined how popular property investment remains. Not just in spite of economic uncertainty but because of it, people want to own bricks and mortar. Coupled with the limited housing supply, it is unlikely that demand will suffer in a way that would significantly affect prices.

Even when interest rates have been high, house prices have risen. Indeed, the UK base rate averaged 7.21% from 1971 until 2021. In the same period, average house prices rose from £5,000 to £250,000.

Sources: Trading Economics and Land Registry

To find out more about how our bridging finance products and our new buy-to-let mortgage product can support your property investment strategy in 2022, get in touch today.

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