How will the Bank of England base rate increase affect tenanted property ?

 

1690 was the year France was victorious over England during the “Nine Years’ War”, they were the dominant naval power, it was recorded as the greatest tactical naval victory over the English. England had to re-group and build a powerful naval fleet to re-establish itself as a global power. At the time the low credit of the government under William III’s rule and zero public funds made the prospect of such a move impossible. This was the catalyst for the creation of the Bank of England (BOE) in 1694, which was the only limited-liability corporation allowed to issue bank notes and funded half of the navy’s rebuild. The bank of England became the national reserve.

The BOE’s mission statement by way of the “about the bank” detail on the official BOE website is to:

“promote the good of the people of the United Kingdom by maintaining monetary and financial stability.”

On the 2nd of November the BOE finally raised the base rate from 0.25% to 0.5% since 2007. So why does the BOE adjust the interest rates?

The official statement from the BOE website is:

“it is attempting to influence the overall level of activity in the economy in order to keep the demand for, and supply of, goods and services roughly in balance. Doing so results in a rate of inflation in the economy consistent with the Bank’s 2% inflation target.“

One of the key reasons the BOE (lead by Mark Carney and his team) decided to increase the Base Rate from 0.25% to 0.5% was because how to make a tenancy deposit claim & to counter the UK economy’s gap in productive capacity, with unemployment falling to a 42 year low and it’s lagging performance when compared to overall global growth (significantly lower and impacted by the fall in exchange rate since the Brexit vote).

This being defined by the “potential” number of goods and services produced if all labour and services were being optimised, against the “actual” level of economic output, otherwise known in economic terms as “slack”.

Interest rate increases usually impact properties in a number of ways, mortgage rates are affected, the supply and demand for capital, and the rate of return for investors as shown below:

The marginal increase seen last Thursday will be manageable for most homeowners. The increase on a typical variable rate or tracker based mortgage of £450,000 will add around £56 to monthly payments, certainly not a reason for mass panic. Those on a fixed rate mortgage will see no change. The housing market’s overall stability has shown resilience in the face of the EU vote and a snap general election. A few extra quid added to the average mortgage repayment will not hinder future property market growth.

For Brent landlords the impact of the rise on mortgage rates will add an extra squeeze to their profits, adding to the growing number of tax changes and tougher regulations that landlords across the country are now facing.

Richard Lambert the chief of the National Landlords Association has already indicated the extra cost possibly being passed onto renters:

“Assuming the lender passes on the rise, which we would expect them to, then it will add an extra £20 a month for every £1,000 they owe. The average NLA member has around £465,000 in outstanding mortgage payments and that means £1,100 extra a year.

Whether the cost is passed onto renters will really depend on their own individual circumstances, their tenants, how easily they can absorb that rise and the general market.”