Base Rate Hike: Time for landlords to fight or take flight?
NRLA Policy and Campaigns Director Chris Norris on what the interest rate rise-announced this week-could mean for landlords and the private rented sector.
The Monetary Policy Committee this week voted to increase interest rates from 1.25 to 1.75 per cent in the biggest single hike for 27 years.
On the one hand, a 50-basis point rise is a big deal, it means that every £100,000 of debt costs an extra £500 per year to service. Put another way, a fairly typical member of the NRLA with 2 or three properties owes on average £330,000 and could face an extra £1,650 in interest payments because of the Bank’s decision this week.
On the other hand, context is crucial. Most landlords, being interested in the long-term and always on the lookout for a good deal, fix their BTL mortgages for either two or five years. At present only around one-third of NRLA members have fixed or variable rate products, a large proportion of whom were already looking to lock in low rates before the recent hike. So not every landlord is likely to see the cost of servicing their credit rocket overnight.
Similarly, 1.75 per cent remains an historically low rate. The average UK base rate over the last 25 years, roughly the same period mainstream BTL loans have been available, was just over 4 per cent. If we look back a little further, 40 years, that average jumps to almost 8 per cent.
Nothing to worry about then……..
Not quite.
With inflation forecast to hit 13.1 per cent this is very unlikely to be the last interest rate rise this year. The Bank of England may well follow the example of the US Federal Reserve in hiking rates to 2.5 per cent or beyond and whilst this would still be well below the rates of 4-5 per cent common in the noughties one crucial factor has changed – to the detriment of landlords.
Prior to George Osborne’s 2015 attack on landlords’ finances, BTL interest was considered a legitimate business cost and could as such be deducted from taxable income. This sheltered landlords somewhat from some of the financial shock associated with interest rate hikes, and crucially protected our bottom-lines.
Without the ability to off-set finance costs (for landlord who own property personally, not via a limited company) higher interest rates will eventually eat into margins and will increase pressure on landlords to either increase rents or look elsewhere for a viable investment. However, the operative word here is ‘eventually’.
Resilient landlords
NRLA members are nothing if not resilient, and in a recent survey 86 per cent told us that a 50-basis point hike would affect profits but not force any sales.
In fact, this polling strongly suggests that the base rate would have to reach 3-5 per cent before significant numbers of landlords would consider disposing of property or leaving the market altogether. Although mitigating action would certainly be required in the meantime.
What should landlords be doing?
In the short-term, nothing drastic. The base rate remains historically low, as do available product rates, such as those offered via NRLA’s mortgage partners: https://www.nrla.org.uk/services/mortgages
Those on variable or tracker rates who are able to re-mortgage, or rate-switch might consider locking in a relatively low rate, if compatible with their plans*. Likewise, landlords able to reduce borrowing (easier said than done I know) could shield themselves from this and future hikes.
Some landlords may also choose to look at the structure of their business and holdings to see if converting to a limited company structure would be advantageous, although professional advice should always be sought in such matters, and it will not be suitable for all. The NRLA has a number of expert partners who may be able to assist: https://www.nrla.org.uk/services/tax
In the longer-term the Government needs to act. We need to convince the incoming Prime Minister and his or her cabinet that the hostile treatment of private landlords and unjust way in which we are taxed at present will not only hurt our industry but add to the cost-of-living crisis as the price of accommodation rises to cover landlords costs.
In 2016, we commissioned an economic model of the potential impact of significant interest rate increases post Mr Osborne’s reforms and predicted the loss of almost 100,000 additional homes to the PRS, additional rent increases of almost 2 per cent, and £600m of losses by landlords. All of which would be catastrophic should it come to pass.
We will shortly be asking members help in lobbying policy makers and contributing to original research on this issue. Please keep up to date via our website here: https://www.nrla.org.uk/campaigns/tax-and-finance
*This should not be considered financial advice
