A Little Perspective
11th November 2017
I believe, that the recent rate rise will not have as strong an impact as many people think. A distinction needs to be made between fixed rates and floating rates. There are various names like Base Rate Tracker, Standard Variable Rate, Discounted Rate, Capped Rates and so on, however, if you strip out the various names, there are only two types of products on the market: one which goes up and down, and the other which stays fixed. If we look at the latter, the correlation between mortgage products and the base rate is not as close as it once was. Most of the mortgage products for BTLs have been a lot higher than the base rate for many years, already incorporating anticipated rate rises within their current rates; it’s easy to see why there’s not much room to fall, probably zero chance, and there’s only one direction to go, which is upwards.
A cursory scan of products shows 75% LTV Buy To Let products floating around the 2.75% range, these are fixed rate products varying from two to five years. This is five times the new base rate. In contrast there existed a closer relationship between mortgage products and the base rate when it was around the 5% mark, in the pre credit crunch era, with it peaking at 5.75% in 2007. I remember a 90% LTV self cert mortgage product at the time offered by Mortgage Express at 4.99%, fixed for seven years; this was with a 5.25% base rate in the background. This product was priced to actually incorporate a rate drop during its term.
The rate rise will of course affect those on a Base Rate Tracker and variable rates. The effect of the rise will be felt without much time lag.
The rate of 0.5% has been in existence since May 2009, with a further drop, to 0.25% in 2016. Those who took a base rate tracker or a discounted rate prior to 2009 have been on a long honeymoon period, and everyone knows honeymoons are not meant to last this long. I even heard of one borrower who was on a Discount Rate of 0.69% below base. When the rate went to 0.5% he would have been on a rate of -0.19%. This would mean, technically, the bank should be paying him every month! However, there was a clause in the contract which meant he had to make a nominal monthly payment.
The real question is what impact this will have on the property market. The market has taken some hits in recent years, and a rate rise doesn’t help. Although, the extent of the impact this rate rise will have, in my opinion, has been exaggerated.
The market will evolve with the changes. Increasingly, we are seeing investors that are seeking opportunities further from their tradition London base. Foreign money is still coming to the UK, due to unstable geopolitical situations in countries like Saudi Arabia, Kenya and India. This combined with the soft pound means UK property is still an attractive proposition. Traditionally, foreign money would be attracted only to Central London, however, we are finding foreign investors to be far more astute and savvy and are concentrating on returns rather than postcode.