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    • 3%

      Pre-September 2022
    • 6.5%

      Post-September 2022 Peak
    • <4%

      Expected 2023

    The Rise and Fall of Interest Rates

    The Rise of Interest Rates

    Mortgage rates had risen during a time of political instability in the UK when the September mini-budget was announced, which caused inflation. This was due to a declaration of unsustainable loans and tax cuts. This led to lenders immediately withdrawing over 40% of available mortgages.

    Bank of England raised base interest rates to a height of 3% because inflation is too high. However, while the Bank of England’s base rate has increased, mortgage rates have started to reduce. In October 2022, mortgage rates were raised to an average of 6.55% for a two-year fix, according to Moneyfacts.

    Another factor was increased market activity, with mortgages in high demand there are a huge number of applications in circulation. Lenders have been working hard to keep up with demand. However, they have had to increase mortgage rates to reduce pressure.

    The Fall of Interest Rates

    Interest rates are now expected to drop below 4% in 2023. This is 1.5% lower than previously forecasted. For investors, this could signal more flexibility in lending options moving forward.

    After the response to the mini-budget, the decision was soon reversed, and a new government was formed. When Rishi Sunak became the prime minister, the economy stabilized. Interest rates have been steadily dropping since the new cabinet was instated.

    Mortgage Bankers Association has claimed that since the rise in interest rates, the number of mortgage applications from first-time buyers has dropped a total of 21% year-on-year. This is a trend expected to continue and should see interest rates continue to decline. The decrease in activity is also a result of high inflation, increased cost of living and the end of the help-to-buy scheme.

    What Does This Mean For BTL Investors?

    Interest rates dropping is great news for buy-to-let investors. It shows the stability of the UK property market. Despite a recent dip, the market has started to recover in a matter of weeks. Investors can now be confident in securing good mortgage rates in 2023. This should offer buyers peace of mind that the UK property market is resilient and that their capital would be secure.

    Benefit from High Rental-Demand

    Many potential first-time homeowners have decided to continue to rent, this is evident with the decline in mortgage applications. The influx of renters has increased demand for quality accommodation, with tenants looking to continue saving for their first homes. For landlords, this will only further increase rental prices and assure a higher return on investment.

    Right now, there is a huge demand for rental properties across the UK, due to Generation Rent. Many young professionals would rather rent than buy a home as rental properties to better accommodate their lifestyles. Furthermore, the cost of living is at an all-time high, so tenants are looking to rent apartments to save money on their utility bills.

    Investing Off-Plan

    Property investors looking to buy off-plan are in a particularly strong position, as during 2023 and 2024 interest rates are expected to continue to fall. For investors, this means they could secure a mortgage later as the development approaches completion. This could still offer a strong return on investment, even with higher mortgage rates. Return on investment will remain strong because of high rental demand. New-build apartments are attractive to tenants who want high-quality accommodations with new technology and facilities.

    Off-plan properties are often found below market value too. This means a smaller deposit can be used and lending options do not need to stretch as far. These properties usually experience high levels of capital growth as the infrastructure in the surrounding area is developed. Surrounding areas will grow to fill the needs of the influx of residents including, shops, bars, parks, and other amenities. As the area becomes more desirable property prices will increase. Buying a property off-plan gives investors the chance to get in early before property prices can reflect the level of growth in the area.

    What Mortgage Options Are Available?

    Fixed rate: A fixed rate mortgage deal is a set interest rate which is usually available for 2 or 5 years. Having a fixed rate mortgage gives buyers peace of mind, knowing each payment will be the same. This allows the landlord to budget far easier and be secure in the knowledge that the rental income will cover the mortgage and interest.

    Standard Variable: A standard variable mortgage deal is usually the most expensive on the market. A lender can decide to change the cost with little to no warning, making it hard to budget for. This is the default mortgage option which allows the buyer to switch with no exit fees.

    Discount Variable: A discount variable mortgage deal usually last up to 2 years with a discount below a lender’s standard variable rate. For example, if a lender offers a -1% discount and their standard rate is 4% the buyer would pay 3%. Once the discount variable period ends, the buyer will be moved back to a standard variable deal.

    Tracker: A tracker mortgage typically follows the Bank of England’s base rate with an additional 1.5%. This means if the Bank of England had a base rate of 0.1 then the interest rate on this deal would be 1.6%. However, if the Bank of England increased their base rate to 3% buyers would pay 4.5% interest.

    For more information on buy-to-let mortgage options, download the CityRise Definitive Guide to Buy-to-Let Mortgages, here.

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