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Why Interest Rates Are Rising – and What It Means for Investors

interest rate rise

In June, the Bank of England hiked UK interest rates for the fifth consecutive time, upping the base rate from 1% to 1.25% as it seeks to curb soaring inflation. 

So, what’s driving the latest rise? What does it mean for property investors, and how high could interest rates go? Read on as we answer all your questions.

Inflation Continues to Soar

Few people have escaped the impact of recent price rises, affecting everything from your bill at the supermarket checkout to the cost of heating your home and the price of filling up at the pumps.

Inflation currently stands at 9%, marking a 40 year high – and there’s no sign of it ending. The Bank of England recently warned inflation could go beyond 11% at some point this year, adding further fuel to the fire of a cost of living crisis that is already impacting millions.

Why Are Prices Rising So Fast? 

In many ways, it’s a perfect storm being driven by post-pandemic demand, the war in Ukraine and other factors such as the high number of vacancies in the job market.

Prices started to rise in 2021 as the UK economy opened up after Covid restrictions. Many businesses struggled to meet this surge in demand and found it difficult to obtain the relevant supplies and materials, leading to a shortage of many products.

In March, we saw energy prices soaring as a result of Russia’s invasion of Ukraine. The war has also increased the price of many supplies involved in food production.

There are other factors involved, too. For example, a record high number of 1.3 million job vacancies means employers are having to offer higher salaries to attract new candidates and retain existing staff, meaning increased operating costs for many businesses.

Why Are Interest Rates Increasing?

One way to control inflation is to increase interest rates and make borrowing more expensive. This means fewer people will be inclined to borrow and encourages saving, reducing the amount people spend overall and ultimately helping bring down the rate of inflation.

The Bank of England has set a target inflation level of 2%, and increasing the interest rate is one step towards achieving this. It won’t have an immediate impact, though – and it’s likely further interest rate rises are on the horizon.

How High Will Interest Rates Go?

It will be interesting to see what happens to UK interest rates in the months ahead – but many analysts agree this latest increase won’t be the last one we see.

Some believe rates could reach 3% to 3.5% – but more conservative economists have this at 1.75%. 

Last October, the Office for Budget Responsibility (OBR), the UK Government’s economic adviser, looked at the economic impact of higher and more persistent inflation. In the event of this coming to fruition, it set out a scenario where interest rates could reach 3.5%.

What Does the Interest Rate Rise Mean For Investors?

Higher interest rates make it more expensive to borrow, making mortgage-funded buy-to-let investments less attractive and adding to the buy-to-let nightmare already facing many landlords.

The BBC reports that homeowners with a regular tracker mortgage will pay around £25 a month more as a result of the latest rise – and £115 more than before the first rate rate spike in December 2021. 

But the impact for landlords is even greater, since most buy-to-let investors use interest-only tracker mortgages. This is where the interest rate on the mortgage is directly in line with the base rate set by the Bank of England, so your monthly payments increase immediately following any interest rate hike.

On an interest-only mortgage, which make up the vast majority of buy-to-let mortgages in the UK, the impact of even small increases can be huge. 

For example, an investor paying 2% on their mortgage could see their monthly payments increase by 50% if interest rates rise by 1% – as they have done between December 2021 and June 2022.

What If I Have a Fixed Interest Rate Mortgage?

For those on a fixed interest rate deal, trouble may lie ahead in the coming months and years once the fixed rate comes to an end.

What’s more, it could be difficult to find a new deal when the time comes. This is because lenders will undoubtedly start to become more cautious about who they lend to – and how much they are willing to lend. Those who are already stretched may find themselves in a tricky position.

What Should I Do?

As ever, it’s important to monitor the economy and the property market closely, and seek advice from an expert where possible.

With interest rates rising, many people will want to stay away from lenders for the foreseeable future, if at all possible. Now could be the time to consider reducing your borrowing and possibly selling some of your property assets.

If you’d like to speak to one of our property portfolio managers, please give us a call on +44 (0) 1708 922 222 – or get in touch to request a callback.

Important note: The information provided in this article is general in nature and does not constitute personal financial advice. If you are unsure whether an investment is right for you, please seek professional advice. If you choose to invest, the value of your investment can both rise and fall so you may get back less than you put in.