For the fourth time in a 6-month period, the Bank of England has increased the base interest rate alongside record-high inflation. As rates are anticipated to continue to rise in 2022, the impact of expensive borrowing on the cost of living starts to become a concern for many. More specific worries that can arise include: what do rising rates mean for buy-to-let (BTL) investors and the housing market, and are BTL investments expected to remain viable if this trend continues?

Since December 2021, the rate of interest has been increasing gradually and now stands at 1%. The latest increase occurred on 5^th May 2021, having risen from the previous 0.75%. Following a record-low of just 0.1% at the start of the Covid-19 pandemic, interest rates are now growing in line with soaring inflation, and they are likely to rise further in the coming months.

How will property prices be impacted?

The effect of the pandemic on the UK housing market over the last couple of years has forced the BoE to reduce interest rates to bolster the property market, which, alongside a cut in first-time buyers’ stamp duty, led to somewhat of a property frenzy amongst home seekers as buyer confidence grew. As a result, the demand for homes spiked, but now that rates are making a U-turn and the stamp duty holiday having ended, industry experts and investors speculate what this might mean for property prices.

As of March 2022, the average house price in the UK is valued at £278,436. That’s an increase of nearly 10% since this time last year. To keep up with inflation and the search for space caused by Covid-19, house prices are still high and don’t appear to be cooling down. On the contrary, they are rising to help maintain margins – albeit at a steadier rate compared to inflation, and demand amongst buyers and renters remains.  

The below graph shows that, in the first quarter of this year, both seasonally and non-seasonally adjusted property transactions increased gradually, following a pandemic-related and seasonal slow-down towards the end of 2021.

So, despite rising rates and higher prices, the appetite amongst those ready to buy continues. However, the next question to consider is how long this can, realistically, keep up before affordability drops, should inflation and interest rates continue to climb.

Looking ahead to the remainder of 2022, expert opinions are varied. Rising interest rates will certainly influence property prices, but the extent of that effect is a little ambiguous. A possible scenario is that the cost of homes may grow alongside interest rates to keep up with inflation and maintain margins, but another speculation could be a cool-down in the UK property market if people struggle to afford the price hikes.

Impact of rising rates on mortgages 

When purchasing property in times of high inflation, a key potential impact of rising rates to be wary of is around purchasing ability. As borrowing becomes more expensive, the eligibility criteria for some borrowers toughen the process. 

In terms of mortgages, one advantage of having a fixed rather than flexible mortgage is being locked in for the agreed rate of interest for a set amount of time. During that period, if interest rates rise, you won’t be affected until that deal expires. If your mortgage rate is flexible, you’ll be affected by changing rates in real-time, which can be good or bad depending on the way the rates move. In the current economic climate, soaring rates make borrowing more expensive and increase monthly repayments. To put this into perspective, let’s consider the average UK property price and the average UK monthly rental value of £1,091. With the latest 0.25% increase on a 75% loan-to-value (LTV) mortgage over a 25-year term, the monthly repayments will grow by £23.

With the above in mind, you may be wondering if this is a good time to fix your mortgage. The question of how worthwhile is will depend on your personal and financial circumstances. If you’re considering fixing, it’s a good idea to think about any additional costs that may incur. For example, be sure to double-check the regulations in your contract around any exit fees as this may counteract any potential savings you might make from locking in on the current interest rate. Don’t forget to add any broker fees that may apply to the renewal of your contract as well, as this will also eat into your potential long-term savings.

If you’ve done your research and you’re ready to fix, it’s useful to shop around. Being well-informed on your new mortgage deal is crucial, but the best deals on the market won’t stick around, so it’s important to find the right deal for you but to act decisively once you do. If you’re unsure about the next steps or how to find the best fixed mortgage deal for you, it’s always advisable to speak to a financial professional for tailored assistance.

At what rate is it still viable to invest in BTLs? 

Online broker Property Master advise that landlords can expect an additional monthly cost of up to £40 per property following the recent interest rate growth. They explain that the average rate of 2-year fixed mortgages increased by up to 0.3% and BTL Standard Variable Rate mortgages grew by 0.25%.

In short, viability is maintained as long as all regular outgoings are covered and a profit remains. One key step in the BTL investment process is to run your calculations beforehand and visualise what those profits might look like and the expenses that you will need to cover. At this stage, if you notice that your mortgage repayments outweigh your rental income, then that may not be a viable investment for you. So, it’s important to make sure that your rental income is substantial enough to generate a profit after those expenditures. At the same time, rental income should be realistic and competitive for the area that you’re looking to buy a property in, so it’s worthwhile doing your homework in this area, too, and ensure that the costs you’ll require from prospective tenants are fair and achievable.

For guidance on tackling these calculations, we’ve covered some common questions around ROI and BTL investments here.  

Where can I get the best BTL yield?

Despite the different concerns posed by escalating interest rates, industry experts reveal that 34% of landlords have the intention to buy further properties in 2022, and researchers at Zoopla have uncovered that the UK private rental sector is set to grow by 4.5% this year.

So, with investor appetite staying strong for now, what are some of the things to keep an eye out for if you’re planning to invest in BTLs? One of the key areas that are important to keep up to date with is rental yield hotspots. These will change with consumer demand and economic shifts, so it’s useful to know which locations hold the returns potential that meets your needs.

The following UK rental yield hotspots for 2022 have been recorded by Track Capital:

Comparing the above with consumer demand, property portal Rightmove announced the below top 5 rental property hotspots in the UK:

It’s not surprising to find that the most profitable locations are in the north of the country, and the interest amongst property-seekers appears to be matching the trend.

Generally speaking, the average BTL property could generate a 5%-7% yield, but this number can be higher or lower depending on a number of variables such as property price, location, property type, and property size. Essentially, a “good” rental yield is determined by all necessary maintenance costs being covered while ensuring that your rental covers – and outweighs – ongoing expenses.

For guidance on tackling these calculations, we’ve covered some common questions around ROI and BTL investments here.  

Alternative ways to generate BTL income

Buying and managing physical property can be a strain in many ways. One of those ways is time consumption. From finding the right property and securing a mortgage, to finding the right tenants without having a long vacancy period – these are just a few boxes that aren’t always easy for BTL investors to tick.

At Propiteer Capital, we offer a hands-off approach to BTL investments with our Residential Rentals bond, through which funds are backed against profitable, recession-resilient assets. Within the Residential Rental bond, properties are only bought based on their rental income, so their value remains stable in a recession and their profits increase with inflation. Additionally, to help reduce the impact of any non-tenancy periods, we spread the bond across a large number of properties and, just like a standard BTL, monthly payments are available.

Suitable for sophisticated and high net-worth investors, this bond offers a short minimum term of just 12 months and an exit notice period of 60 days, and returns of up to 5.5%, providing added flexibility to your investment without the hassle of managing physical property.

To find out more about us or our Residential Rentals bond, visit our website or give get in touch with our friendly team at info@propiteercapitalplc.com or 01376 319 000.

Rates are accurate at the date of publishing. For our latest rates, please visit our homepage.

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