The UK property market has continued apace in spite of higher mortgage rates, but the Bank of England’s long-awaited interest rate cut should open up opportunities for property investors.
Today, the Bank of England revealed an interest rate cut of a quarter of a percentage point, bringing the base rate down from 5.25% – where it has sat since last August – to 5%. This is in response to improving inflation levels over the past few months, and is expected to result in greater consumer confidence.
When it comes to the property market, interest rates set by the Bank of England are important as they can have a big impact on the cost of borrowing from mortgage lenders. Most analysts now expect lenders to be able to drop their borrowing costs further, enticing more property investors to buy and sell.
However, mortgage rates have followed their own patterns since the start of this year, despite the base rate sitting at 5.25%. They have largely fallen since Christmas, with a slight uptick more recently, and finally more rate cuts over the past two weeks. This could have been in anticipation of today’s announcement.
More falls needed to stimulate property market
After peaking at average highs of around 6%, borrowers across the UK can now secure deals at closer to around 5% for an average fixed rate mortgage, although it largely depends on the product type and the level of deposit being put forward.
In the buy-to-let mortgage market, property investors have seen numerous rate cuts and new product launches over recent weeks, as lenders compete to entice more borrowers in this space. Today’s announcement should also help this section of the market, allowing potentially more rate cuts.
Higher mortgage rates have arguably had an even greater impact on landlords and property investors, due to tax changes in 2020 to the amount of mortgage interest tax relief that can be claimed. This is one of the factors that has caused some smaller landlords to exit the rental property market, putting a strain on supply in the private rented sector.
Property investors could see more rate cuts
The Bank of England’s interest rate cut was the first since 2020, and despite the property market demonstrating that it has already become accustomed to the “new normal” – evidenced by buoyant prices, and rising transaction numbers so far this year – the rate cut could create a new wave of confidence among buyers and property investors.
According to David Hannah, Group Chairman of Cornerstone Tax, the interest rate decision is a “positive step in the right direction” for the UK property market, adding that there has been “chaos in the mortgage market” since the original decision to set the base rate at 5.25%.
“Additionally, a record number of landlords have exited the private rental sector, contributing to higher prices for tenants who once aspired to take their first step on the property ladder.
“I’d urge the MPC to continue this momentum by considering another interest rate cut in their next meeting, even a reduction by a quarter percentage point would signal further optimism within the UK economy.
“A target base rate of 3-3.5% should be the overall goal if the BoE want to truly prioritise prospective buyers.”
Meanwhile, Simon Gammon, managing partner at brokerage Knight Frank Finance, believes that lenders had already “cut margins to the bone” with their recent rate cuts in the face of the stubbornly high BoE rate.
“That said, we’ve seen that the larger lenders are happy to take a hit to profits to gain market share, so we may well see another round of marginal cuts in the days ahead.”
Rachel Springall, finance expert at Moneyfactscompare, has some advice for borrowers deciding on their next move: “Despite the latest falls, borrowers may want to see a bigger injection of rate competition, particularly as rates are higher than they were six months ago.
“Those desperate to secure a new deal for peace of mind could do so a few months before they come off their existing deal, as some lenders will let borrowers do this from three to six months in advance.”
The same rule applies to property investors seeking to remortgage an existing investment or to take out new borrowing on a prospective purchase, with lower mortgage rates allowing property investors more scope to maximise their returns.
If you’re looking for your next investment opportunity in the UK property market, get in touch with BuyAssociation today.
