property investing and rising interest rates

Rising rates: How do they affect property investing

Rising interest rates and property investing have made the financial media headlines many times in the last few weeks. Average home prices in the UK and many other buoyant economies hit new record highs almost every month with some economists suggesting that the housing market is overheated.  

On the other hand, central banks such as the Bank of England (BoE) have raised interest rates and considered further changes in their monetary policy. The US Federal Reserve (Fed) and the European Central Bank (ECB) haven’t raised rates yet as their boards suggest that there are still other means to adjust their policies.  

Consumer price inflation rises in the UK and the US

As measures against the coronavirus pandemic are lifted, the opening of the economies has been combined with rising inflation figures. In the UK, the Office for National Statistics (ONS) announced that the rise in consumer prices, on an annualised basis, came in at 5.5% in January. This has been the highest figure recorded in the last 30 years.  

In the US, the Bureau of Labour Statistics (BLS) published a report which showed that the consumer price index rose 7.5% in January on a year-to-year basis. Things are even worse in the US as the inflation rate rose above 7% in December and January, hitting 40-year highs.  

Why do the Bank of England and the Fed raise interest rates

Rate rises are one of the ways to combat rising consumer prices. Low-interest rates have been used in the past to fuel economic growth, especially in times of an economic downturn such as the 2008 bank crisis that hit the US and the UK and the 2010 Eurozone debt crisis.  

Banks kept borrowing costs at historic lows for many years. However, some economists had expressed concern over this strategy as it had a direct impact on local economies and capital growth. Now, the tide has turned with banks choosing to tighten their monetary policies. 

In its February meeting, the BoE’s Monetary Policy Committee (MPC) raised borrowing costs by 25 basis points to 0.5%. Although the hike was anticipated, four out of nine MPC members asked for a larger increase.  

According to economists who scrutinised its last meeting minutes, the Fed’s Federal Open Market Committee (FOMC) is on track to increase borrowing costs. The excerpt said that “most participants noted that, if inflation does not move down as they expect, it would be appropriate for the Committee to remove policy accommodation at a faster pace than they currently anticipate.” 

Is the UK housing boom over?

House prices in the UK as well as in other countries have been boosted by loose monetary policies that include low-interest rates. The average house price in the UK rose by £7,785, on a monthly basis, to a record high of £348,804 in February 2022. Housing prices rose even during the pandemic as buyers had access to record low mortgage interest rates. Rental growth also exceeded expectations, fuelling the current housing boom with property investors choosing to invest in rental properties.  

It is too early to judge if the UK housing boom is near its end. Some economists expected that the end of the stamp duty holiday would hurt the property market. Statistics showed that this didn’t happen, showing the underlying strength of the country’s economy. The BoE’s rate policy suggests that financing a property investment in the future will be more costly, but economists will be able to present more data to support this view in the next few months.  

Does raising interest rates affect the property market?

But what is going to happen now that mortgage rates will increase? Mortgage rates are linked to the central bank’s interest rates. When the cost of borrowing increases, investment in property as a whole becomes more expensive. Monthly mortgage payments might also increase depending on your agreement with the lender.  

People who would like to invest in property may be less willing to obtain the mortgages they require in order to enter the real estate market if interest rates are high at the time of purchase. The value of real estate stagnates or declines due to fewer people looking to purchase.  

Interest rates are a significant factor in the housing market cycle. Therefore, it is critical for prospective home buyers to focus on where interest rates are and where they may be headed. 

Should you consider remortgaging?

Some property experts have been talking for a while about remortgaging, and now is a great time. Rising interest rates will likely increase mortgage costs, making payments more expensive, decreasing the level of disposable income. Property investors coming to the end of their fixed rates might have a shock when their mortgage reverts to the standard variable rate. 

Investors who are currently on a tracker will likely have their payments increased again. Lenders will be increasing their rates, so property investors need to get in there quick!  

Investing in property with Holborn

Properties have always been and always will be attractive investments. Even during the Covid-19 pandemic, property values appreciated beyond any expectation as borrowing rates reached an all-time low as central banks scrambled to support economies. Although the upcoming increase in rates might make a prospective investor have second thoughts, property investing will always be a key element of every investment portfolio.

If you are considering adding property to your portfolio, speak to a professional. At Holborn, we work with clients to secure property investments through a complete end-to-end service. We offer investment opportunities across the UK and internationally.

Because we work closely with some of the leading property developers, we can offer clients exclusive investment opportunities at competitive rates.

To find out how we can help you, contact us using the form below.


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