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No spooky surprise for households as interest rates rise

Written by Tom Beckford

Junior Account Executive

On Thursday, the Bank of England’s (BoE) Monetary Policy Committee voted 7-2 in favour of the first UK interest rate rise since July 2007. Previously at 0.25%, yesterday’s decision saw rates reach a more modest 0.5%, still the second lowest on record.

 BoE Governor Mark Carney has outlined the intentions of the Committee to deliver rate rises within the next three years, if current economic forecasts prove to be accurate. But what does this mean for homeowners, renters and first-time buyers?

Those with mortgages are the least likely to be affected or concerned by the rate rise. Nearly 60% of households have seized the opportunity to fix their repayments, with interest rates remaining low in recent years. If, as is predicted, rates reach 1% by 2020, the impact will be phased and households given plenty of time to prepare.

Instead, the private rented sector will bear the largest brunt of the increase. Landlords with buy-to-rent mortgages will be under rising pressure, especially in the wake of additional regulation and recent stamp duty increases. London rental prices have increased by 23.3% since 2011, and further increases would undoubtedly anger residents.

John Goodall of Landbay believes that the BoE’s move “could fire the starting gun for an increase in residential rents”, however this temptation will need to be carefully balanced against the risk of losing tenants and need to maintain property occupation.

Already hard-pressed renters will feel hard done by if this scenario comes to fruition, as landlords were reluctant to drop rents in line with interest rates after the financial crash. Many will see a rent increase as unjustified given the industry’s record in the recent past, whilst those receiving Local Housing Allowance (LHA) will see their budgets squeezed further due to the recent LHA cap.

First time buyers hoping to see a drop-in property prices will be left disappointed, with advice to purchase as soon as possible remaining unchanged. Those in the final stages of saving for a property purchase will see a short-term benefit, as interest rate increases will be passed on to savers quicker than by mortgage lenders. In the long term, a series of interest rises may impactaccess to mortgages, making it harder for first time buyers to get on the ladder”, according to Dean Clifford of Great Marlborough Estates.

Regardless of their position within the property sector, households will notice little immediate difference. The BoE is conscious of the economic impact that a series of incremental rate rises will have, and has therefore provided families with sufficient time to make the necessary financial adjustments for the coming years.