The Bank of England confirmed at the beginning of November 2021 that mortgage rates are to remain at 0.1% for the time being, but movement in the financial markets suggests that many are anticipating as many as two rate rises in 2022 as inflation levels begin to rise slightly.
This historic low interest rate has been in place since March 2020 to help the economy through the Coronavirus pandemic, and it has done its job extremely well in that time. Now that we are exiting the worst of the crisis and the economy is returning to its previous robust state, many are sensing that the Bank may well need to up rates in the near future.
Indeed, this includes the Bank of England governor, Andrew Bailey, who seemed to confirm as much in September when he admitted that a base rate rise before Christmas was possible, and that the Bank would “have to act” on inflation.
This also includes major high street lenders such as Barclays, Lloyds, Halifax and Nationwide which have already announced interest UK mortgage rate rises on some products in anticipation of this move, and are shifting the mortgage market as a result. At a basic level, this means that if you take out a mortgage when rates are higher, you will end up paying more in the long run.
However, if we assume that the speculation is correct, mortgage interest rates rise next year and the lenders have correctly assessed the future, it could offer certain advantages to property investors.
The first way is that it offers a way for investors who have mortgages to take pre-emptive action now to secure their financial future.
While it is true that some lenders are already raising interest rates on some property investor mortgages, and withdrawing some other low interest rate products, this is not the case across the board. There are plenty of mortgage options out there that have maintained the lower rate in accordance with the current Bank of England rate, and here is where an opportunity may lie for those who have already invested.
By remortgaging existing properties, investors can take advantage of the remaining low interest rate products and lock in that rate for the coming years – insulating themselves from rises. Even though the interest rate rises ahead may not be significant, remortgaging in this way now may be a good way to insure yourself and your portfolio against significant cumulative rises in the long run.
The second way that the potentially rising interest rates can benefit investors concerns new purchase – namely, that the market will favour cash buyers in the future even more so than it already does. If you pay cash up front for your purchase, your spending power will be magnified over those who use a mortgage due to the fact that there are no increased interest payments to consider.
This means that your rental yields will automatically be higher than those who are using a mortgage to fund their purchase – and increased rental yield means a higher monthly cash flow.
The same applies to capital appreciation. If you buy outright in cash, every pound of value that is added to your property by the growth of the housing market is another pound that you can either reinvest or take out as profit. In contrast, those using a mortgage will have to pay the additional interest on top.
This additional spending power will enhance your investment capabilities in future. For example, by purchasing in cash – and avoiding the higher interest rates – you can afford to buy in a better location, or fund a larger property that may be more attractive to potential tenants.
This is especially true if you are purchasing off-plan where you effectively pay below-market rates during the construction process. By doing this, you can magnify your potential to earn capital appreciation as it builds during the construction process, and increase your potential profits or spending power even further in future.
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Overall, there is no reason for investors to be worried by the potential for increases over the current UK mortgage rates in 2022. In fact, the opposite may well be the case for may buyers, particularly those buying off-plan property with cash who stand to benefit from the changes.
The UK property market is extremely strong, and the profits on offer for investors will far outweigh any minor rate increases that may occur. Demand in the rental market is stronger than ever before, and house prices are also increasing at a record pace. This is the ideal time to invest and take advantage of extremely good circumstances for investors.
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