Preparing for a rise in interest rates
An issue for new homeowners that has been dormant for eight years may again be on the rise. Interest rates are a large contributing factor for home purchases and there is recent speculation of the rates rising. We at Jeremy Jacob will explain how interest rates affect home purchasing, letting, and our future rate prediction.
How interest rates affect home purchasing power
Rates have been historically low around 0.25-0.5% since 2009. Investors have been taking advantage of low rates to purchase property with leverage. This is because interest rates set the borrowing rate, making interest payments historically low. However, many homeowners forget that this is an extreme and rare circumstance. Historical average of rates are approximately 5%, which greatly increases the cost of borrowing money.
Interest rates for letting
When rates do rise, this can make it difficult for a segment of the population to purchase property because the cost of borrowing will increase. To accommodate, letting will become increasingly popular in the future because it avoids the high financing costs. It is therefore a more affordable short-term option for residents.
Expectation for Rate Rise
The Bank of England sets rates to combat inflation and ensure economic growth. A weak global economy in 2009 prompted a sharp decline in rates to near 0%. A foreseeable future of economic stability is necessary to raise rates; else a slip back into recession is possible.
The UK will be in negotiations with the EU over the next two years regarding trade and policy regarding ‘Brexit’. The negotiations will be affecting which companies choose to operate in the UK and the trade potential of the UK with other countries. It would be a bold move by the Bank of England to raise rates substantially within the next couple years for threat of falling back into a recession. More economic certainty is needed in the future.
On the other hand, the USA has been taking slow steps at raising their interest rates in the past year and will continue to do so in the coming years. The UK traditionally follows in the rate changes of the USA. Therefore, the UK will have potential to raise their rates as well. We at Jeremy Jacob predict that interest rates will begin to slowly rise in 2018.
Further Action
Overall, the uncertainty ahead still reasons that interest rates will not substantially rise any time soon. This makes it an optimal time to continue investing in property because rates are low. Invest wisely now and then reap the rewards in years to come by renting out property when the rates rise. To be secure in your investment, we at Jeremy Jacob would advise our buy-to-let landlords to calculate and factor in a buffer for interest rates rising of 5-8%.
