Could you afford £1,162 pa interest rate hike?

BOEUPDATE: The Bank of England raised the base rate from 0.25% to 0.5% on Thursday 2 November.

Odds on the Bank of England raising interest rates for the first time in more than a decade are now so low, that it’s hardly worth placing a bet; but what would a rate hike mean for landlords after so many years of historically low rates.

What is likely to happen?

When the Monetary Policy Committee (MPC) meets tomorrow (2 November 2017) they are expected to vote in favour of increasing rates for the first time since 2007.

Of course there is no guarantee that a majority will vote to hike rates, in fact there have been numerous occasions over the last few years at which point an increase looked to be on the cards only for the committee to agree to hold station.

If the bookies, and majority of commentators, are right this time around it is likely that we will see a rise of 0.25 per cent. Bringing the Base Rate back to where it was up until the referendum last year.

This might not sound like very much, and in historic terms it isn’t, but for heavily leveraged landlords – many of whom have grown unused to rate increases – it could come as a bit of a shock.

So what does it mean in practice?

If you have mortgage debt, which is not fixed i.e. you have a variable or tracker rate product, you’re interest payments will increase.

In fact for every £100,000 of outstanding finance you have a 0.25 per cent increase will add £20.83 per month to a landlord’s interest payments.

Monthly Interest Payment Increase
Loan Outstanding (£) 0.25% 0.50% 0.75% 1%
£50,000 £10.42 £20.83 £31.25 £41.67
£75,000 £15.63 £31.25 £46.88 £62.50
£100,000 £20.83 £41.67 £62.50 £83.33
£125,000 £26.04 £52.08 £78.13 £104.17
£150,000 £31.25 £62.50 £93.75 £125.00
£175,000 £36.46 £72.92 £109.38 £145.83
£200,000 £41.67 £83.33 £125.00 £166.67
£225,000 £46.88 £93.75 £140.63 £187.50
£250,000 £52.08 £104.17 £156.25 £208.33
£275,000 £57.29 £114.58 £171.88 £229.17
£300,000 £62.50 £125.00 £187.50 £250.00
£350,000 £72.92 £145.83 £218.75 £291.67
£400,000 £83.33 £166.67 £250.00 £333.33
£450,000 £93.75 £187.50 £281.25 £375.00
£500,000 £104.17 £208.33 £312.50 £416.67

 

The average NLA member landlord has £465,000 of mortgage debt outstanding. Therefore they will pay an additional £1,162.50 per year if rates increase by one quarter of one per cent – assuming of course that all of their loans track the Bank of England Base Rate.

Will rates continue to rise?

Frankly, nobody knows. However, the best (educated) guesswork points to this being an isolated increase for the time being.

While inflation is higher than the Government’s target, wage growth has continued to stall and the Bank will not be keen to increase households’ cost of living excessively.

Likewise the impact that weak Sterling has had on spending and domestic prices looks likely to fade away, particularly as the market has already begun to react to the possibility of a hike.

The safest prediction seems to be that the Bank will increase rates to 0.5 per cent, and then leave them there for 2018 – but no-body, even perhaps Mark Carney, really knows for sure.

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