Whenever there is a change of any sort, there are always winners and losers. In principle, when interest rates go up, the winners should be savers, but there are already questions being asked as to when (and indeed if) banks will pass the recent increase on to savers.
Even if they do pass it on in full and promptly, a rise from 0.5% to 0.75% is highly unlikely to turn cash deposits into the stuff that retirement dreams are made of (or that housing deposits are made of). On the other hand, it’s probably a safe bet that lenders will quickly pass on the rate rise in full to borrowers and while it’s equally unlikely to be the stuff of financial nightmares, it could turn out to be the last straw for UK buy-to-let landlords and a major issue for first-time buyers.
Mortgage tax relief goes down as interest rates go up
Under the old system of mortgage tax relief, interest-rate fluctuations were not really an issue since mortgage interest could be set against rental income for tax purposes. That, however, was then and this is now. Now buy-to-let landlords have to come to terms with the reality that, in theory at least, interest rates can be raised as high as the Bank of England wishes, whereas the cost of absorbing those rises now rests with the landlord in first instance.
Claim up to $26,000 per W2 Employee
- Billions of dollars in funding available
- Funds are available to U.S. Businesses NOW
- This is not a loan. These tax credits do not need to be repaid
The key point in that last sentence is, “in first instance”, because, of course, landlords can only continue in business if they can make a profit and so ultimately a landlord’s costs have to be passed on to tenants. What’s more, it is entirely within the bounds of possibility that the interest-rate rise, coming on top of everything else, will have the effect of encouraging smaller-scale buy-to-let landlords to divest themselves of their buy-to-let property (portfolio) and look at other forms of (property) investment.
Regardless of whether the properties are bought by residential buyers or other landlords, there is going to be some form of reduction on the supply side of the rental market (either fewer rental properties or fewer landlords letting them) so unless there is also a corresponding reduction in demand (which seems unlikely given the UK’s high population density), there is almost certainly going to be an increase in rents.
First-time buyers could also feel the pinch
Even though a rate rise should make it easier for renters to save for a deposit, it is very questionable how much of a difference it will make in real terms. It is, however, only too easy to see how an increase in rents (as landlords pass on their costs to tenants) could more than outweigh the benefits of any improved return on savings, all the more so because landlords may be passing on more than just to cost of the interest-rate rise. They may be passing on the cost of the many other changes the government has implemented over recent times.
In theory, if buy-to-let landlords exit the market in significant numbers, then first-time buyers could benefit from reduced house prices, but this assumes that they can afford a mortgage and higher interest rates make this more difficult.
Author Bio
Hopwood House are specialists in property investment, with a large portfolio of opportunities in the student property, hotel room and buy-to-let investment markets in the UK and overseas.
