Thursday 6th of August 2015 has been labelled “Super Thursday” by various newspapers. It was the day then when Mark Carney, the Bank of England’s Governor, got together with eight other key members of the bank as a committee to cast their vote about possibly raising UK interest rates.
This day was dubbed as “Super Thursday” as the decisions of the interest rate policy meeting were published, together with its minutes and the Bank of England’s quarterly inflation report instead of a traditional fortnight break.
2015 saw inflation levels in the UK at a historic low at around the 0% mark, almost dipping into negative inflation (referred to as deflation). This has led to interest rates being extraordinarily low, creating a favourable environment for mortgage lenders with interest rates standing at 0.5%. It is said that this year’s marginal interest and inflation rates have meant that housing became relatively more affordable again in the UK.
Additionally, wages together with the overall economy have grown substantially, too – according to the ONS, the economy grew by approximately 0.7% in the second quarter of this year compared to 0.4% in the first quarter. Overall economic output stood at 2.6% above the same period of time last year.
A seemingly flourishing economy which appears to be getting back on its feet from the downfall of the last financial crisis let many to believe that the pressure for the Bank of England is on to increase interest rates. The proposed action to raise interest rates however, is disputed by many experts. Some argue that thanks to a record 10 quarters of sustained economic growth, the country and the borrowing industry are ready for an increase in interest rates without being negatively affected. Others argue that an increase in interest rates would result in harmful consequences for the British property market, as even less people would be able to afford purchasing their own home, consequently causing house prices nationwide to soar once more.
There are two sides to every coin, but what exactly happened on “Super Thursday” and how does the result affect the British buy-to-let market?
The decision made on Thursday was very clear: The majority (8 out of 9) members voted to keep interest rates at the same level. This means that interest rates have now persistently stayed at approximately 0.5% for the past six years, in the aftermath of the global financial crisis in 2008.
It is furthermore expected that inflation will remain almost static at around zero for the next few months, before it will rise to the banks’ target of 2% in two years’ time. Additionally the Bank of England has also revised its forecasts for UK growth and wage development: The British economy is now estimated to increase by as much 2.8% by the end of this year instead of 2.5%; and wage growth is set to see an upsurge of 3% compared to earlier predictions of 2.5%.
John Longworth, the director general of the British Chambers of Commerce, commented approvingly on Thursday’s results: “It would have been imprudent to push through a rate rise at this moment when our economic recovery remains in need of care and encouragement”.
For investors this means that borrowing money from the bank remains affordable – particularly at a fixed-rate. This situation also allows for many investors to re-mortgage their properties in hope of getting rid of variable loans and finding the cheapest fixed rate mortgage deal available to them. These borrowing conditions mean that current investors can expect to see higher capital returns
Nevertheless, it has to be said that at one point rates are going to go up again. According to the meeting of the Bank of England’s committee, this will start to happen at a steady, only marginally increasing pace: a first upsurge is expected to happen in early- to mid-2016, with borrowing costs reaching as much as 1.5% by the end of 2017.
Whilst it is suggested that property investors should take advantage of low interest rates to expand their portfolio at a good price, they should do so carefully, as interest rates are going to surge up again eventually. This is why buy-to-let landlords must anticipate these rises and increase their rents accordingly to cover all their expenses. However, as buy-to-let properties are a long-term investment, when chosen with careful consideration and research, they prove to withstand fluctuations in interest rates.
Are you looking to invest in buy-to-let property? Contact Adam at Cadman Homes (01788 560 905) to talk through your criteria and needs. We have access to local and national new build and resale properties, including some of the hottest off plan investment properties in the best growth areas nationally.
Source (by Christine Schulz, Knight Knox, 13th August 2015)