Mortgage Interest Rates – is there trouble ahead?

28 August 2015

After being at historically low levels for an unprecedented period of time, the Bank of England has signalled that interest rates are finally on their way up. But what will the effect be on the property sector and on homeowners?

Of particular interest to us is the possible effects on our leaseholders, whether they be owner occupiers or landlords. Additionally, what will the effects be on the property management sector in London?

Interest rates have been fixed at 0.5% for six years, and probably will remain at this level well into 2016. But after that, the bank have warned that rates may rise slightly. Signs of a strengthening economy seem to be prompting this impending rise.

Even if rates do rise, it is likely to be a gradual process. Most experts are predicting that rates will hit about 1% by the end of 2016 and 1.5% by the end of 2017. But forecasts have been wrong before, and some commentators say that rates won’t really rise at all. The vast challenges facing western economies may result in lower growth that puts off any rates rises.

So how will homeowners have to adjust to any rise? An ever growing proportion of borrowers have never experienced higher rates, and might struggle to deal with any rise in mortgage costs. If rates were to rise by 1% it would add nearly £4000 a year to interest payments on a £250,000 loan. With property prices in London being so high, any effect will be felt most harshly.

Landlords might have to increase rents, forcing tenants into cheaper properties. Or they might decide that the property investment sector has become to risky and sell up, depressing property prices. The loss of the mortgage interest tax break will exacerbate this.

Young professionals who fought to get a foot on the property ladder will have to cope with increases in their monthly mortgage payments which many will inevitably struggle with. How many of these homeowners will fail to meet their payments and lose their homes?

Only time will tell how much or how little interest rates rise, but the effects on the property market could be very significant for all those involved.