The decision of the Bank of England Monetary Policy Committee (MPC) to raise the base rate by 0.25 per cent this month may not seem like a very drastic move, but in its historical context the decision has been widely seen as highly significant.
Although it is true that the cut from 0.5 per cent to 0.25 per cent during the panic that followed the 2016 EU referendum was reversed a few months later, the increase to 0.75 per cent has a wider significance. It has been described as the first “real increase” since 2007, with the MPC’s minutes hinting that this is the start of a process, albeit probably a slow one, of moving the base rate back towards something that might be considered historically normal.
Interest rates and inflation
Here Experience Invest looks at how the change in interest rates may impact property investors.
In its minutes, the MPC revealed that the vote was unanimous and signalled its intention to take further action to curb inflation. It said: “The Committee also judges that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the two per cent target at a conventional horizon.
“Any future increases in bank rate are likely to be at a gradual pace and to a limited extent.”
Investors thinking about how the increased cost of mortgages might impact them need to weigh up two key facts. Firstly, the clearly stated intention of the MPC is to bring the base rate upwards, essentially acknowledging that normalisation is required to prevent inflation from continuing to exceed the target rate.
However, the pace is bound to be slow, not just because the MPC has said it will be, but because the UK economy continues to face some uncertainty, largely because of Brexit.
The minutes noted: “The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.”
Moreover, there is a long way to go to reach ‘normal’ if that is considered to be the sort of levels the base rate was at before the credit crunch began in 2007. Indeed, apart from the rise from 0.25 per cent to 0.5 per cent last year, the last increase had been from 5.5 per cent to 5.75 per cent way back in the summer of 2007, shortly before the crisis broke and caught everyone on the hop. It was only in the face of the prospect of the biggest financial meltdown since 1929 that the rate was then slashed from five per cent to 0.5 per cent between October 2008 – when Lehman Brothers collapsed – and March 2009.
Since there is no prospect of any upturn or giant surge in inflationary pressure in the economy remotely equivalent to the shocking events of late 2008, there is no reason to imagine rates will rise fast. Therefore, investors who plan their property purchases with a strategy that factors in gradual rate rises over a sustained period of time are likely to judge the situation correctly, even allowing for Brexit-related uncertainty.
Even so, there is always a chance that a base rate rise can influence buyer behaviour, even if this is not expected.
Speaking after the recent increase was announced, Halifax managing director Russell Galley said: “With regards to the recent rise in the Bank of England base rate, we do not anticipate that this will have a significant effect on either mortgage affordability or transaction volumes.”
It remains to be seen whether the apparent shift in the market is a blip or a trend. If Halifax is right, not much will change for investors except the need to allow for any buy-to-let mortgages they have being a little more expensive, with the chance of more rate rises possibly influencing a decision over whether to seek a fixed-rate deal.
Cash buyer benefits
Of course, buyers who are in a position to make a cash purchase don’t need to worry about the impact fluctuating interest rates could have on their investment. Those who buy property outright have the luxury of being able to ignore challenges in the mortgage market and focus on other trends – such as property prices and tenant demand – and what significance they could have.
Furthermore, property investment is an effective way for people to make their money work harder for them.
For example, investors in the Opto Student Newcastle development can currently receive four per cent interest on deposited funds. The accumulated interest is deducted from the final cost of the unit.
The wider significance of this is that people investing in this particular project are likely to earn more interest on their money than they would receive from a bank. Combined with the strong likelihood of consistent tenant demand, rental yields and capital growth, this financial benefit makes Opto Student Newcastle – as well as other developments like it – a viable and highly attractive option for investors.