Buy to Let? Be Aware of the Effect of Interest Rate Rises

Forecasters are increasingly warning of a rise in interest rates, and there is growing opinion that this will happen within the year. Earlier in the year Paul Fisher, the Bank of England’s executive director of markets, warned that rates will at some point become ‘normalised’ at around 5%.

Of course, this won’t happen overnight, but landlords with buy to let mortgages need to be aware as interest rate rises could cause some into a critical financial position if and when this happens.

Because of the amount of people looking for buy to let mortgages, along with high margins, many lenders who were not previously in this market are now lending specifically for this purpose. Buy to let loans are judged on whether the amount of rental income will exceed the mortgage repayments. Currently this needs to be at least 125%.

The problem occurs if lenders don’t take into account the forecasted interest rate which rises when calculating the loan. If interest rates do rise to around 5%, this means that most of the current buy to let mortgages will be charging around 8 or even 9%, leaving many landlords in the position of their rental not covering the mortgage repayments.

However, although at the beginning of the year it was forecast that base rate rises would probably be seen around August, there are now opinions that this may not happen until as late as December. This has seen some mortgage rates fall, and other deals being offered. These include the Leeds Building Society reducing the rate by 0.15 % on its two year discount buy to let mortgage.

Skipton Building Society is another example of a lender who has recently dipped their toes back into the buy to let market after ceasing in 2009. They stated that as the market is beginning to show signs of stabilising they were happy to cautiously begin lending once again in this area.

Those on a fixed rate mortgage may find that if their rate is coming to an end they may not be able to find such a good deal. Those with other types of mortgages need to consider their options carefully. Tracker mortgages in particular could see repayments spiral upwards should the interest rates rise back up to 5%.

Despite the threats of interest rate rises, it appears that the buy to let market is once again becoming buoyant. As long as you are aware that interest rate rises are pretty much inevitable at some point in the future, then there is no reason why buy to let properties are not still a good investment. Just be aware of what the future may bring, do your sums properly and you too could enjoy the income and security which becoming a landlord can offer.

Priest Properties a Nottingham letting agency offering Property Management Nottingham for landlords.