What do rising rates mean for landlords and how high will they go?
Anyone looking at applying for a mortgage or remortgaging at the moment wants to know where interest rates are going – especially yield-conscious buy-to-let landlords.
Swap rates (the rates mortgage lenders must pay in order to mitigate the interest rate risk in a fixed rate mortgage) have been rising dramatically over the past few months due to market expectations around rising interest rates, fuelled by economic uncertainty. That’s pushed up mortgage rates.
The Bank of England is raising the Bank Rate (AKA: the “base rate”) to tackle spiralling inflation made worse by Russia’s invasion of Ukraine. With a fresh jump in home energy bills expected in October, the Bank forecast inflation would rise above 10 per cent this year – the highest level since 1982.
How high will the Bank Rate go?
There are three measures we can use to estimate how high interest rates will rise.
1. The first is nominal interest rates relative to money GDP growth. This measures whether short-term policy interest rates are above or below GDP growth. This suggests that the Bank Rate has been too low since about 2010. And it indicates the Bank Rate will rise to more than 5 per cent.
2. The Taylor rule is a formula for calculating the Bank Rate based on the inflation target. It was proposed by the American economist John B. Taylor who was the economic adviser in the US presidential administrations of Gerald Ford and George (H. W.) Bush. Analysis from Professor Trevor Williams of the University of Derby suggests that the peak in interest rates could be 3.75 per cent and that rates have been too low for too long.
3. Finally, financial markets expectations for the months ahead are much higher than last year but suggest the Bank Rate will be 2.6 per cent by the end of April 2023.
Those are the indicators, but what do two decades in mortgage broking tell me?
The Bank Rate will probably peak at about three per cent. Even if I’m wrong and the Taylor rule suggests they’ll go higher, it’s worth remembering that interest rates are still almost ridiculously low by historical standards – despite four interest rate rises from the Bank of England. Even at three per cent, the rate would still be very negative in real terms.
What should landlords do next?
Any landlords who are not on a fixed rate yet should be considering moving to one. Securing a competitive deal now will help to draw in higher rental yields, and protect you from more expensive rates. The last time inflation was this high, the Bank Rate was 10 per cent.
Today, if you have a deposit of 40 per cent, you can get a 10 year fixed-rate buy-to-let mortgage at 3.29 per cent.
At these levels, the cost of servicing a mortgage is more manageable than it has been in most other UK periods.
You could consider remortgaging onto a fixed rate mortgage for five or 10 years. Long-term borrowing at 5.5 percentage points below the rate of inflation is as close to free money as it gets.