The Bank of England has voted to raise UK interest rates, for the first time in over a decade.
Interest rates are going up to 0.5%, from 0.25%.
That means the Bank has reversed the rate cut of August 2016, when it eased monetary policy to help Britain’s economy through the aftermath of the Brexit vote.
First Time Buyers who have purchased a property in the past 10 years have become accustomed to stable, low interest rates now need to prepare for the possibility of increased fluctuation in rates over the coming years.
The announcement will also have an impact for a large number of tenants, as Buy To Let landlords re-assess their financial models and account for the possibility of further increases in the future.
With many tenants already dangerously close to affordability limits, this could have a significant and damaging effect on the sector.
Paresh Raja, CEO of bridging specialist MFS said the Autumn Budget now takes on greater significance as it must find ways of alleviating stress and providing support for property buyers.
“While the impact on the UK property market may not be immediately obvious, it is important to note that the rise in interest rates will place an added financial pressure on first-time buyers and buy-to-let investors needing to borrow money.
With the interest rate now sitting at 0.5%, this is a prime opportunity for the Government to address issues like real estate demand and Stamp Duty to ensure the market remains buoyant and readily accessible for homebuyers and investors alike,” he said.
To Nick Marr, Co-founder of property marketplace TheHouseShop.com the ‘no surprise rise’ rise marks a significant change in direction following almost a decade of record low interest rates.
Marr said: “Today’s interest rates rise announcement may not seem like a substantial increase, but it is highly likely that this will be followed by further increases over the coming years as the Bank of England puts an end to the almost decade of record low rates.
“Many homeowners, especially First Time Buyers who have purchased properties during this period, will need to re-asses their mortgage repayment budgets and make plans on how they would cut costs should rates rise even further over the coming months and years.
“It is not just homeowners that will be affected by the new increased rates. The boom in the Buy To Let market over the past 5-10 years has meant that a large number of tenants in the private rental sector could also be affected by the rates rise.
“Buy To Let landlords plan their budgets and set rents according, in large part, to their mortgage repayments, and the new higher interest rates will be yet another blow for landlords’ profits and tenants’ affordability.
“Many UK landlords are already planning to raise rents following the Section 24 tax changes and proposed ban on letting fees to tenants, and this new announcement could push even more landlords to consider rent rises.”
Recent research revealed many tenants as already dangerously close to affordability limits, with 1 in 4 private renters spending more than half their monthly income on housing costs.
A more significant rates rise in the next few years, could see a substantial increase in the number of tenants struggling to keep up with rent payments.
“While the new rates rise should not cause immediate alarm for mortgage holders, it should prompt anyone with a stake in the housing market to re-assess their investments and plan ahead to take account of the new direction of travel that the Bank of England has signalled with this announcement,” said Marr.
The National Federation of Builders (NFB) believes the rise will help construction SMEs chase late payments across their supply chains.
The Late Payment of Commercial Debts Regulations of 2013 allows companies that are owed payments to charge interest at 8% of the debt plus the Bank of England’s base rate.
Richard Beresford, chief executive of the NFB, said: “The interest rate rise will give SMEs more leverage when chasing late payments, but there is still some way to go.
“When the Bank of England previously cut interest rate in 2016, we asked the Government to increase efforts to tackle late payment more aggressively. Construction continues to have the worst payment record of any industrial sector, with SMEs owed more than £30 billion in unpaid invoices.
“SMEs make up for more than 99% of the construction industry. This is an opportunity for SMEs to test the small business commissioner who can deal with late payment claims, confidentially if required.”
More housing related reaction:
Mark Harris, chief executive of mortgage broker SPF Private Clients: “‘The Bank of England’s decision to raise interest rates by a quarter point was widely expected, whether it should have actually happened or not, as the rate setters managed to back themselves into a corner.
“With five-year Swap rates at 1 per cent, the market forecasts the average position for base rate over the next five years to be at that level, so borrowers do not need to panic, as any rate rises are likely to be slow and moderate.
“However, there is a whole generation of borrowers who have never known a rate rise so psychologically it could have much more of an impact for them.
“The increase has already been factored into mortgage pricing, with most lenders hiking the cost of their fixed-rate deals over the past couple of weeks.
“However, we don’t believe it is the end of cheap mortgages with Nationwide actually cutting its fixed rates this week, illustrating the ultra-competitiveness of the market.
“Some lenders may well be prepared to absorb rate increases into their margins, as they are still chasing business. The plethora of new lenders has also led to increased competition in the mortgage market, which is good news for borrowers.
Emmanuel Lumineau, CEO at BrickVest: “Today’s announcement is momentous for the UK economy and should signal the start of a series of gradual increases.
The Bank of England has decided that inflation is potentially getting out of control and the economy now requires higher borrowing costs.
The decision also signals that the UK economy has not performed as weakly as the Bank predicted last year.
“Increasing interest rates has a direct impact on real estate. Higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices.
“There has certainly been an abundance of international capital flowing into real estate, almost every major institutional investor globally has been increasing their portfolio allocation to real estate over the last five years mainly because of lack of alternatives.
“We continue to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long-term office space requirements.
“If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market.
“Indeed our recent research showed that 34% of institutional investors believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months.”
Danny Waters, CEO of Enra: “A rise in interest rates has been on the cards for a while now, so it’s no surprise to see the Bank of England implement one today.
“Its likely brokers and lenders would have already factored a base rate rise into their plans, and after months of seeing lenders slash their rates, we may start to see them increasing again in the coming weeks.
“The specialist lending sector in particular is in a good position to deal with any effects of the Bank of England’s decision.
“Bridging finance remains competitive and there is still plenty of scope for continued market growth, as small property businesses use it to finance those projects that are better suited to the flexibility of bridging than other financing.
“For second charge mortgages, with unsecured consumer debt having expanded again recently, interest rate rises are likely to drive more consumers to cut their debt costs by securing against property, thereby enhancing the healthy growth we have seen in second charge lending this year.”
Ishaan Malhi, CEO and founder of online mortgage broker Trussle: “The age of record-low interest rates appears to be coming to an end. While we’re only seeing a fractional increase, homeowners who aren’t on a fixed rate mortgage should still be considering how this will affect their monthly payments.
“The average variable rate borrower will be paying an extra £17 this December, and although this doesn’t seem like a lot, it adds up over the course of a year.
“Those with high mortgage debt will be paying a lot more.
“Depending on how inflation responds to today’s increase, there’s also every chance we’ll see another base rate rise in the next six months or so.
“With this in mind, now is the right time for borrowers to lock in a low fixed rate mortgage, and there are still plenty of good deals on the market.”
Lea Karasavvas, managing director of Prolific Mortgage Finance: “Mark Carney has handed a generation of borrowers, who have never experienced a rate rise, the fright of their life.
“But if he hadn’t, Halloween would have been only the second scariest event of the week.
“The Bank faced a terrifying loss of confidence if it balked again, after one of the most hyped run-ups to a rates decision in history.
“The market, convinced it was coming, had already voted with its feet. The pound had climbed, swap rates had risen and every lender bar Nationwide had increased interest rates in anticipation.
“Historically, inflation of 3% has been the magic number to trigger rises and this has been borne out again.
“Homeowners knew the writing was on the wall. We normally expect fairly equal numbers of remortgages compared with new purchases, but we saw remortgaging running at 90% of all mortgage activity in October.
“That represents a massive flight to safety for those already on the housing ladder and not a hugely encouraging vote of confidence on the demand side.
“Consumer confidence fell last month so I expect we’re going to see this kind of sentiment continue to filter through the broader economy.”
Lucy Pendleton, Founder Director of independent London estate agents James Pendleton: “Londoners who have clambered onto the housing ladder in the last ten years are entering a brave new world.
“Anyone not on a fixed-rate deal will likely be witnessing something they’ve never seen before, the rising cost of monthly repayments.
“But that’s not going to come as a surprise to anyone. Buyers are savvy and won’t be thrown by this. Most have been telling us they have already factored in an entire percentage point rise over the course of the next year.
“That’s a direct result of the will-they-won’t-they uncertainty that has been created by the Bank repeatedly kicking the can down the road. This small increase won’t move the market and will actually give buyers more certainty about the direction of travel.”
Grainne Gilmore, Partner, Head of UK Residential Research, Knight Frank: “The first increase in the base rate in a decade is a notable event, especially as there is a feeling that this may be the first step in a series of rate rises.
However, seen in isolation, this quarter-point rate rise only reverses the cut seen last year, and the base rate is still at a historic low.
Even if there are two more rate rises in the next year or so, the base rate will still be at a notably lower rate than seen in any other period of history since the Bank records started in 1690.
Some mortgage holders will see their repayments affected by the change in rates, and mortgage rates on new home loans will rise, but in terms of the residential market, the move is unlikely to have an impact on overall pricing, although some rents may edge up if buy-to-let landlords affected by the change pass on their increased costs to tenants.
However, if there is another rate rise in the coming months, confirming the country’s move into a rate rise environment, this may have a wider effect on sentiment in the market.”
David Hollingworth, L&C Mortgages: “Although the rate rise only takes Base Rate back to the same level as before the post-referendum cut in August 2016, it’s significant as will represent the first ever rate rise for a generation of mortgage borrowers.
Those on variable rates are of course the most vulnerable to a rate rise and they should expect to see their monthly payments lift.
“That could put a further squeeze on monthly household budgeting which has felt the pinch of higher inflation feeding through.
Lenders passed on the rate cut last year and so it will be of little surprise to see their variable rates edge back up.
“An increase of 0.25% on a £150,000 standard variable mortgage at 4.5% over 25 years, would see payments rise by more than £20 per month.
Worrying about what a lender will do with their standard variable rate can be something of a red herring considering how competitive mortgage rates are for those that shop around.
“In our experience at least 90% of borrowers (and currently more) have been fixing in recent years.
Those that have so far failed to take advantage of the record low fixed deals will find that rates have already edged up as expectation of a rate rise increased.
“Nonetheless borrowers can make big savings over SVR and also protect against any future rate rises”.
John Goodall, CEO and co-founder of Landbay: “The first rate rise in a decade could fire the starting gun for an increase in residential rents.
“Landlords have had to face a catalogue of challenges over the past couple of years, from stricter regulation, reductions to tax relief, and a significant stamp duty tax hike when buying a buy-to-let property.
“Many expected these would be passed on to tenants, but low mortgage rates have enabled landlords to absorb much of these costs, especially those that are wary of tenants facing negative net wage growth, so a base rate rise could make all the difference.
“Whether tenants are renting as a stepping stone on the way to home ownership – or in some cases choosing to rent for life – this generation are relying on a well-served buy-to-let market to ensure rental growth doesn’t become unbearable.
“What is now needed is some firm Government commitment to improving standards, affordability and supply of rental properties.
“Fast approaching, this month’s Autumn Budget will be a chance for the Chancellor to reassure the industry on its plan for tackling this growing demand for housing.”
Ray Withers, CEO of Property Frontiers:“To put things into perspective, the rate is only returning to 0.5% – the same level it has been at for nearly a decade, from the 2009 financial crisis, right up to the Brexit referendum.
Prior to the financial crisis, interest rates were above 5%, having risen steadily since 2003, and this did little to slow the growth of house prices during that bonanza.
“The BoE has indicated that future rate rises will be extremely gradual, perhaps another 0.25% in a year’s time, and another a year after that.
Across the pond, interest rates have been rising at a similarly glacial pace, and the end of quantitative easing at the European Central Bank is expected to have similar consequences.
“Today’s hike in the base rate is not a circumstance peculiar to Britain – it is part of a very gradual shift in the world economy as it emerges from the lingering effects of the financial crisis.
“The drivers of that shift are all positive for house prices in the long term, outweighing the effects of marginally more expensive mortgages in the short term.
“Savings accounts will still be offering no more than 1.5% – nowhere near the returns available to investors in the rental market.
“Overall, monetary policy still overwhelmingly favours borrowers – including mortgage borrowers – over savers.
About 60% of mortgages are on fixed rates, avoiding any effect whatsoever for the remainder of the fixed term, while the other 40% may be modestly affected.
“On a typical £150,000 loan, investors will be exposed to around £15 per month of extra mortgage costs – hardly enough to discourage purchases and a relatively insignificant dent to investor yields.”