Mortgage advisor Lawrence Gary talks about the impact recent rates rises have had on the property market and homeowners.
Avoiding the pressure of the rate increase
The Bank of England’s fifth increase of interest rates since August last year is causing some concern among homeowners and investors. The increase continues the record of being the highest interest rate for the last six years pushing up rates by a quarter of a point from 5.5 per cent to 5.75 per cent. It is a worrying trend and some are asking rightly if it is set to continue. With pressures on mortgages and other expenses most are understandably concerned whether things will get worse before they get better.
Is another increase in rates likely?
Interest rates are likely to rise again in the near future because the bank is struggling to keep inflation in check. As low inflation keeps prices stable and preserves the strength of our economy the bank cannot afford to let it spiral. Unfortunately due to increased spending and borrowing the bank has to take steps to correct these factors and increasing interest rates is the main tool they have available. As the rate increase continues to pinch our spending habits will change and interest rates may stabilise. Presently all the indicators suggest another rate rise in the future may be required to return inflation to the target of 2 per cent and curb our spending and borrowing.
What impact will this have on property prices?
If the rise helps stem the increase in property prices then that would be one good thing to come out of it. However, I still believe that because of a shortage of properties then no matter how expensive they are people will continue to stretch to buy because we all need a place to live and properties offer a sound investment for the future. Unfortunately supply and demand have more of an impact on property prices than interest rates. Once there are more properties available then prices will stabilise however the current shortage is exacerbating matters.
The impact of the increase is more likely to be felt on other household expenditures as homeowners struggle to meet the increase in their mortgage payments.
How will this affect buy-to-let mortgages?
Property investors will know that the rental coverage on an investment property determines the loan to value ratio of buy to let mortgages. Generally speaking this means that the higher the rent the greater the ratio of money you can borrow against the property’s value. The standard ratios are between 80 to 90 per cent loan to value. As higher interest rates mean higher mortgage payments investors are concerned that the deals will not stack up to allow them to access the maximum borrowing on their investment. While this is true higher interest rates are stopping more people from investing so it means they will have to consider renting and therefore higher rental demand should provide an opportunity for increased rent. If this is the case then the rise in rates should correspond to a rise in rent which should still allow decent borrowing in the most desirable areas. This will not be true for all areas.
What can I do if I am struggling to cope with my mortgage payments?
A mortgage is usually the biggest financial commitment you will have to make in your life and even the smallest change to interest rates will have a big effect when you apply them to your mortgage.
If you are struggling with your mortgage payments because of the interest rate increase you should contact your current lender to review your mortgage to see if they have a better product for you in the first instance.
Even if you are comfortable with the latest increase I would still urge you to regularly review your mortgage because new products come onto the market all the time and you should ensure you have the most competitive product. Many of my friends own properties and it surprises me how many of them have never sought advice or reviewed their portfolio even when they are out of their redemption periods. I regularly review my portfolio and always ensure I have the best financial advice available.
We all work so hard for our money and need to be more prudent in maintaining greater control over it to ensure we get the best returns from our endeavours. After reading this column contact your bank, financial adviser or even Milestone Financial Services for a free review of your mortgages to see if there are better products available which could start saving you money today!
Lawrence Garry writes as a property investor and is a director of mortgage adviser, Milestone Financial Services. Email him at lawrence.garry@milestonefs.com. Also call 020 7719 0170 or visit www.milestonefs.com