Last month we discussed the possibility of a rise in interest rates. We think that the anticipated rise in interest rates will not happen this year. As things stand, interest rates are most likely to rise in February of next year.
Mr Carney is a very clever man. Making the smallest suggestion in his Mansion House speech that interest rates would rise in the short term had the effect of increasing rates! Hence the clever Mr Carney was able to have a soft impact on the economy without actually increasing rates. Of course, the press say he has been making wrong predictions, but that is because most commentators cannot see how clever the man is.
So, what will happen when rates increase next year, and what should you do about it now?
The Bank of England’s calculations regarding lending and the growth of home ownership show that virtually all increases in lending since 2006 have come from buy-to-let mortgages. There has been hardly any increase in mortgages to home owners since that time. Nearly 20% of the mortgage market is now buy-to-let mortgages. In 2006 it was less than 5%, and in 2000 it was only 1%.
Very few buy-to-let mortgages are fixed rate. This means that when rates increase landlords will see a sharp increase in payments. Remember, if interest rates rise from 0.5% to 1%, this is a 100% increase! Many landlords will suddenly find that they have negative cash flow and this will result in the sale of a vast number of properties. This will happen at just the same time as the supply of houses increases because of the present building boom.
But remember – next year’s rate rise will be the first of many. It is likely that rates will increase to 2.75% or so by 2019. That is a six-fold increase in interest rates – just think what this will do to the supply of houses.
So what should you do?
If you have a rental property that is mortgaged, you should sell now at the top of the market. If you don’t sell, you should fix the mortgage rate now, for at least 5 years.
If you’re looking to buy a property, it will be best to hold back for nine months or so. Unless you’re in an area that is starved of supply, good deals will almost certainly be around next summer.