The Bank of England has increased the Base Rate (BBR) to 5% last week. Earlier in the year, industry experts were unanimous in their predictions for just two Base Rate rises throughout 2023. However, recent activity and nervousness surrounding the money markets have meant today’s announcement will not come as a surprise, and is the thirteenth consecutive rise since December 2021.

 Why has the Base Rate increased again?

Industry experts very much expected the Base Rate announcement following the surge of money market activity we have seen in the past few weeks. With core inflation much higher than expected and the ongoing difficulties surrounding the US debt ceiling, there has been a significant amount of nervousness surrounding the money markets, which has driven up SWAP rates.

The increase comes as an attempt to continue to curb UK inflation and prevent core inflationary figures from rising any further. The primary concern from the money markets is that higher prices are becoming embedded across the UK economy. Today’s announcement should hopefully ease some pressure off the financial markets; however, it’s clear we’re not out of the woods just yet.

Will the Base Rate increase again this year?

As it currently stands, industry experts predict a further increase to the Base Rate at the MPC meeting in September, despite today’s surprising 0.5% increase. However, it is highly unlikely we will see the Base Rate decrease until late 2024 at the earliest.

What does this mean for mortgage interest rates?

As always, it’s important to remember that today’s increase to the Base Rate will not directly or immediately impact fixed mortgage interest rate pricing.

SWAP rates are what lenders must pay to other financial institutions to acquire fixed funding for a specific period of time. Activity and nervousness in the money markets drive up SWAP rates and, consequently, mortgage lenders’ cost of funds. Lenders will then have to increase pricing to maintain their profit margins.

It’s highly likely that most lenders will have already factored in today’s Base Rate rise in their fixed rate pricing and will therefore not need to make further changes.

However, for those on Base Rate trackers or some lender standard variable rates (SVRs), you can expect your monthly repayments to increase again from today.

The good news is there is the Banks and building societies will offer more flexibility to struggling mortgage-holders as rates soar. Borrowers will be able to make a temporary change to their mortgage terms, then will be able to return to their original deal within six months. This would allow some to have lower repayments for a short time, by just paying the interest on the home loan.

What does this mean for Property Investors?

The base rate rise also reflects a strengthening economy, which can be seen as a positive for property investors. As wages increase and unemployment falls, there is a greater likelihood of rental growth in the long term. The demand for rental properties is already high which could lead to higher rental yields for investors.

Moreover, the base rate rise may signal a more stable economic outlook and lead to increased confidence in property investment.

Will more landlords be likely to sell up?

In a word yes. According to the Financial Times, there is growing concern that the supply of rental homes could get even worse as higher mortgage costs hit landlords and make buy-to-let investments less attractive – or, in some cases, economically unviable. More than a third of landlords own their properties outright, while another third have loan to value mortgages of less than 50%. The remaining 20-30% of landlords, whose mortgages have a loan to value of 50-75%, are seeing a reduction in income and squeezes on cashflow as mortgage rates increase according to Zoopla. The government’s aim for landlords to increase the energy efficiency of their properties to EPC grade C by 2030 adds further cost considerations, with investment needed to make the necessary upgrades. Private landlords are also having to contend with the effects of measures brought in between 2017 and 2020, which have increased many landlords’ tax bills by removing the ability to deduct mortgage interest and instead providing a tax credit. The impact of these measures has been deferred or hidden due to the very low interest rate environment at the time of introduction. Alongside an increase in the stamp duty payable on rental properties, these tax changes have meant that some landlords are already unable to turn a profit.

The net result is an increased likelihood of landlords exiting the market, with almost two-thirds of RICS UK Residential Market Survey participants witnessing an increase in the number of buy-to-let landlords looking to sell their properties. Additionally, c. 66% of respondents reported a decline in the level of interest from new UK based buy-to-let investors over the past six months, with 30% citing a decline in interest from overseas buy-to-let investors.

What about rental income?

For those landlords looking to retain their buy-to-let properties, there is upward pressure on rental market prices in order to mitigate increasing costs. According to Hamptons estate agents, newly let properties are 25% more expensive than before the Covid-19 pandemic hit in 2020 and still rising at 9% in May compared with the year before. RICS expects rental price growth to average c. 6% per annum over the course of the next five years.

Private rental prices paid by tenants in the UK increased by 5.0% in the 12 months to May 2023, representing the largest annual percentage change since the Office for National Statistics started collecting data in 2016.


Mortgages for Business, BBC, Crowdproperty