Whenever you are considering investing in a particular asset, or even when looking to manage your existing financial commitments, interest rates remain an important aspect to factor in.
Reflecting the ebb and flow of the economy in general, interest rates dictate how much we pay for the everyday essentials as well as more considered purchases including property.
The Bank of England has recently announced hikes to the rate of interest, raising it to 1.25%. This comes after years of historically low rates, with the base rate at an all-time low of just 0.25% seen just a few years prior.
Now it’s all change again, this will ultimately impact any investments you have that are yet to be fully paid off including a buy-to-let mortgage.
While we would always suggest undertaking independent financial advice, here is an overview of what the recent interest rate rise could mean for your mortgage.
Interest Rates: What are they, and why do they matter?
In simple terms, interest rates are a fee that is paid from a person who has borrowed money (i.e for a mortgage) to the person who has lent them that money. In the UK, interest rates are set by the Bank of England.
Interest rates are subject to fluctuations due to market activity, meaning a rising interest rate will see all those who have borrowed money required to pay higher repayments because these repayments are dependent on the interest rate.
Therefore, interest rates affect both the cost of borrowing and the level of rewards someone will receive for saving money.
It is also important to note that there are lots of different types of interest rates, which will depend on the type of mortgage you have.
Interest rate rises in 2022
Governor of the Bank of England Andrew Bailey recently announced that interest rates had to rise 1.25% to combat high rates of inflation.
Of course, the announcement comes against the backdrop of the cost of living crisis, which has seen the cost of wholesale gas rise by 400% in just over a year. In addition, changing spending habits during the pandemic have seen a shift toward spending money on goods rather than on services, which has also had an impact on the BoE decision to raise interest rates.
Impact of Interest Rate rise on mortgages
The current mortgage deal you have, including when it is due to end, will impact whether your mortgage repayment rates are going to be affected by the increase in interest rates or not.
For example, those with a variable rate tracker mortgage which is linked to the Bank of England base rate are likely to see an immediate impact on their mortgage repayments.
However, those with a standard variable rate mortgage will probably experience an increase in their monthly repayment in line with any interest rate rise. The amount is going to be decided by your lender, so an increase in repayments isn’t guaranteed.
Finally, those with a fixed-rate mortgage are likely to be affected as soon as they reach the end of their current deal. Ultimately the rising interest rates could make remortgaging more expensive if you are on a fixed-rate mortgage.
As always it is imperative that you check the conditions of your mortgage and speak to your mortgage lender or broker if you are concerned about the implications of the interest rate changes.
Interest Rate rise: Mortgage repayment example
Our mantra here at Thirlmere Deacon is that you should look at your investment over the longer term. Given we know interest rates are adjusted accordingly every so often, it’s good to think ahead about what a rise or fall in interest rates could mean for your investment.
Based on a mortgage of £200,000 (where the current interest rate is 2.5% and monthly repayments are £897), the following demonstrates how your mortgage rates could be affected.
Small incremental changes of 0.25% upwards or downwards may not seem too concerning. But, if interest rates were to continue to rise, it’s always good to plan ahead to ensure you’d be able to manage your mortgage repayments.
Some tips to manage your mortgage with an expected interest rate rise include:
- Overpay your mortgage while interest rates are low
- Ensure you are on the best deal
- Improve your credit score to be able to find better mortgage deals
- Create a long-term financial plan to weather any potential storms
Property Investment UK – Thirlmere Deacon
Although interest rate rises can be challenging to comprehend, let alone plan for, as an investor it is expected that peaks and troughs are part of the overall journey.
Furthermore, as the supply and demand of property continue to fall short of what’s required in the UK, property remains a trusted tangible asset. Property prices and subsequent rental values also continue to rise at record rates, which is why property remains a popular and solid investment option.
Here at Thirlmere Deacon, we have a number of buy-to-let investment opportunities both here in the UK, as well as over in our Dubai location. Our investment opportunities start at just £75,000, and rental yields are well above the national UK average.
If you’d like any further advice on anything we’ve mentioned above, or if you are considering investing in one of our opportunities, please drop us a message or call us on +44 (0) 2039507939.