First it’s important to realise that any rise in interest rates will probably be a very gradual process. Most experts are still suggesting that any future rises will still leave the interest rate at historic lows.

Also bear in mind that, following any rise, there is likely to be something of a delayed reaction. Some homeowners and landlords are on fixed rate mortgage deals. Many more are on standard variable rates which, more than likely, have the prospects of a rise already built into them. Some landlords don’t have any borrowing at all.

Of course, a rise in interest rates is something that all investors need to keep an eye on, so let’s look at what might happen if and when interest rates rise:

Will buy to let mortgages become that much more expensive? Undoubtedly they will cost more, but maybe by not that much. For example, a 0.25% rise on a £150,000 repayment mortgage (still enough to buy an ‘average’ priced property in the UK) means a rise in monthly repayments of just under £20.

Will margins be squeezed? Yes, but again probably only marginally for the foreseeable future. Other sources of stress on margins, such as changes to tax relief and so on are likely to have much more impact.

Will it be better to keep your money in the bank? Many landlords, of course, have put their money into property as an alternative to lower-than-low savings rates. However, even when interest rate rise it’s unlikely savings rates will become that much more attractive. Savings rates of over 5% – probably the absolute minimum needed to make keeping money in the bank more attractive than even the poorest buy to let – seem a very long time away.

What will happen to property prices? Will your investment fall in value? This is a very difficult one to call. If the cost of borrowing rises you would expect property prices to be impacted, but this is far from certain. Most analysts are still predicting property price rises of around 3-4% annually for the next few years, and have already factored interest rates into their forecasts.

It’s also worth bearing in mind that a shortage of property supply compared to demand in most areas is a big factor in pushing up property prices up. Both employment levels and wages are rising marginally, so these will also tend to support property price rises even in a more expensive interest rate regime too.

And that’s even before the thorny issue of Brexit.

Chances are it will depend, as so often in property, on location. Most areas will see probably see the value of property continue to rise in the face of rising interest rates. A few areas that benefit little or at all from any economic recovery, or which are heavily impacted by public spending and benefits cuts, might see falls.

What will happen to demand for rental accommodation? This is an interesting one. All the experts tell us that demand for rental property over the last few years has been underpinned by lack of mortgage affordability, meaning people have to rent rather than buy. When interest rates rise then, if mortgages become less affordable, there could be more demand for rental property, not less.

Past figures from PwC have suggested that home ownership levels will fall by 10% and most 20-39 year olds will be living in rented accommodation by 2025.

What will happen to rents? It’s important to remember there’s not really any connection between interest rates and rents. If your property is located in an area with strong demand it will probably be possible/necessary to raise your rents to cover rising interest costs. If it isn’t, it won’t be.

Will buy to let become unprofitable? A few commentators have already touted the ‘death of buy to let’, so is there any foundation to these claims?

It’s very likely that more amateur landlords will be dissuaded from entering the market at all or, faced with diminishing returns, might decide to exit it. However, professional landlords will find ways of making buy to let work even with higher borrowing costs and may find that there are more opportunities open to them, not fewer.

In the 80s and 90s landlords worked with an interest rate circa 10%!

With an interest rate rise on the horizon, what should landlords be doing?

As interest rates can only move in one direction, whenever that might happen, all landlords should be planning for a higher interest rate regime over the next decade. This might include: Checking their finances, and maybe taking full advantage of low fixed rates if remortgaging. Consider disposing of any poorly performing buy to lets that might become unviable. Looking at moving into property investments that offer enhanced yields. Here is an Insider article that might provide food for thought: 12 Ways To Improve Your Letting Yields

Lastly, it’s also important to remember that interest rate rises are contingent on improvements in the economy and rises in inflation, both very difficult to forecast in the current economic and political climate.

The post What Will Happen To Buy To Let When Interest Rates Rise? first appeared on Property Insider.

Will 2017 be the year that interest rates eventually rise?

Portico estate agents recently attended the Landlord Investor Show, where The Sunday Times’ Economics Editor, David Smith, gave his expert view on when he expects interest rates to rise and by how much. Here’s what he had to say…

What are your thoughts on the long-term future for interest rates? How long before we get back to somewhere near normal and what needs to happen to get us there?

It’s a very timely question. We sometimes forget how unusual a period we’re in for interest rates. It is 10 years since we had the last increase in interest rates, so we’ve been on these ultra-low rates for a very long time.

The Bank of England reduced the bank rate to 0.5% in March 2009 and until the financial crisis of 2008/9, the bank rate had never been below 2%. Of course we saw the reduction to 0.25% in August following the Referendum, and within that we’ve also seen a narrowing of margins, so mortgage rates have come down quite a lot, even in a period where official interest rates stayed.

Rising inflation is proving to be powerful

It’s a timely question because just last Thursday the Bank of England was the closest it has come to an interest rate rise for quite a long time. Three members of the eight strong committee voted for an increase in interest rates.

And they did so because they fear that the rising inflation that we’re seeing is proving to be a little powerful. The Bank expected inflation to peak below 3% and now I think it’ll go above 3%, so it might be a bit more enduring than they expected even a month or so ago.

The three officials who voted for an increase in interest rates were all external members of the embassy, in other words, they’re not the insiders like Mark Carney and his deputies, all of whom voted to keep interest rates on hold.

Emergency rate cover may be reversed

I think it is quite likely that in the coming months at least one thing will happen: the emergency rate cover we had after the Referendum will be reversed. It was responding to a danger that in the end wasn’t there. The economy didn’t fall off a cliff after the Referendum – in fact it held up very well, so I think the argument for reversing emergency rate cover is quite a strong one.

When will interest rates rise?

Look at the way the markets have interpreted the Bank’s vote; until recently, the expectation in the markets was that you wouldn’t see any increase in interest rates until beyond 2020, now the expectation is that it will be brought forward and we will probably see an interest rate rise next year – and it could come sooner than that. I envisage a situation where the cut in August last year will be reversed, maybe not as soon as August but possibly by November this year.

What happens beyond that?

Well, the guidance we’ve had from the bank is that interest rate rises will be both gradual and limited. In other words they will be done, as the Federal Reserve is doing in America, in baby steps, in a very gradual fashion.

Where we’ll end up in terms of official interest rates, and of course you have to translate that into the interest rates that you actually pay, will be a new norm for bank rate of around 2%. I expect we won’t get there for 2 or 3 years, but that is the kind of guidance that we’ve had from the Bank of England. This compares with an average of 5% before the financial crisis, and it compares with an average of 12% we had in the 1980s. Despite it still being a low figure, it’s still quite an adjustment to move from 0.25% to 2%, even gradually, so it will mark quite a significant change for many people.

Double figure interest rates

Once you get to 2%, I don’t see that we’re suddenly going to move back to the levels that scared us so much in the past. For the foreseeable future, I don’t think we’re going to see double figure interest rates, I think this low, single figure will be the norm, and I expect to see it throughout the 2020s.

Something is starting to stir on interest rates that wasn’t necessarily expected and we will see a gradual move over the next few years up to 2%.

What does this mean for those thinking of buying property?

The rate increase will be slow and gradual over the next few years, when it eventually begins, so I don’t think anybody needs to react today. Plus with the mortgage market still very competitive, the knock on effect to rates available to purchasers will not be hard felt, at least not initially.

That said, even a 0.25% increase can add a significant cost to a mortgage. For most people, the cost of living is already tight, so if you want to get a foot on the property ladder or make that significant step up, now is a great time to lock in a good rate.

I already have a property. Should I fix my mortgage rate now?

Yes, absolutely. I have had friends and colleagues who have stuck with a tracker mortgage under the belief that rates couldn’t increase in the short to medium term. But this just isn’t true. Rates absolutely can rise, and they’re likely to, so if you have a great rate that is affordable to you and works with your circumstances, why not lock it in and have that peace of mind?

Alternatively, if your current mortgage rate is coming to an end or you think you could get a better deal, consider remortgaging. But before you do, make sure you get your property re-valued. This will make your lender recalculate your loan to value, and a lower loan to value means a better interest rate and a larger choice of lenders.

Will this affect landlords or investors?

In the short term no. All lenders are now stress testing buy-to-let mortgages at 5.5%, so an increase is already factored into the lending and affordability. Most investors will also have planned or accounted for some sort of rise in their budgets.

Nonetheless, as the rates gradually get closer to 2%, landlords will be looking to offset this increase and one of the obvious ways for this is via a rent increase.

This is more market driven in terms of available housing and demand from tenants first and foremost and this is what will lead rental prices over the coming years.

If you want to get an up to date valuation for remortgaging purposes, or if you’re just curious as to the current value of your house, click here for an instant property valuation.

Guest post provided by Portico.

The post When Will Interest Rates Rise? first appeared on Property Insider.