Should property investors lock in interest rates now?

On Thursday (November 4), the Bank of England’s Monetary Policy Committee will decide whether interest rates will finally increase, after the record historic low of 0.1% that has been in place since March 2020, to help protect the economy during the coronavirus crisis.

In its most base terms, a rise in interest rates means that borrowing becomes more expensive for those buying property, whether they’re acquiring for their own use or as a buy-to-let investment, while savers typically benefit.

However, the real picture is more complex with the mortgage market already shifting, even based on the rumour of an imminent rate rise. Major high street lenders such as Barclays, Halifax, Lloyds and Nationwide have already announced interest rate rises for many of their mortgage products, in anticipation of the Monetary Policy Committee’s decision.

“There’s a clear temptation for first-time buyers and investors to take up the opportunity of low borrowing rates while they still can and lock in a rate for the next three to five years,” Dale Anderson, managing director of Fabrik Invest, said.

“However, doing so isn’t risk-free. Property prices may cool down slightly once the interest rate goes up, which means buyers could potentially get a better deal if they wait. It’s a tough call.”

So, will the market cool? It’s not out of the question, according to the team at Fabrik Invest, but they say a slowdown seems, on the whole, unlikely.

The firm argues that the UK has a fundamental and sustained shortage of homes – a shortage which looks set to worsen as the price of building increases sharply due to inflation.

“Bricks and mortar have always been deemed a safe mid- to long-term investment in the UK and demand continues to outstrip supply,” Anderson added. “I believe any interest rate increases will be very gradual, so won't affect the market too much, and interest rates will still remain low. That means it makes sense to get on the property ladder or invest in assets that will be cash flow positive as soon as possible.”

Fabrik claim that property provides a solid alternative to low-performing pensions and bank savings rates.

That said, any substantial increase in borrowing rates could have a potentially negative impact on the property market, with more expensive borrowing and falling house prices naturally being a situation that both first-time buyers and investors are keen to avoid.

“It's definitely a balancing act for anyone looking to take out a mortgage right now,” Anderson said. “Lenders have already shown which way they expect the Monetary Policy Committee to vote. All things considered, I think locking in a rate for the next three to five years as soon as possible could be the best course of action.”

Will interest rates really rise?

With approximately a £38 billion rise in public spending and a £25 billion budget stimulus, the Bank of England could well decide to put up interest rates in their latest meeting on Thursday.

When questioned about a possible interest rate rise in an interview with ITV’s Robert Peston last week, the Chancellor Rishi Sunak replied: “Well, obviously interest rates are a matter for the Bank of England and for people watching I would say you should be reassured, because they have a very good track record in meeting our inflation targets, which are to have low and stable inflation.”

He added: “With regard to fiscal policy, which is my responsibility, we have invested in public services and our future growth, but we've done so mindful of inflationary pressures.”

“And part of the reason that I talk about strong public finances, making sure we get our borrowing down, and get our debt falling again, is because I want to protect us against future rises in interest rates, make sure we have a bit of a buffer to cope with those, and that’s what this budget delivers.”

Interest rates last rose in November 2017, when they went up from 0.25% to 0.50%. In August 2018, they rose again to 0.75%, the highest levels since February 2009 when the UK was recovering from the devastation of the financial crisis.

They were expected to rise again, but then the Covid pandemic hit the UK in March 2020, causing interest rates to fall to 0.25% and then record lows of 0.1%, where they have been held ever since. The Bank of England base rate hasn’t been at or above 1% for well over 12 years, with the financial crisis causing interest rates to fall to really low levels to support spending and jobs. 

Over the past few years, the economy has needed interest rates to stay very low – and this was more the case than ever during the pandemic.

Now, however, with inflation fears taking hold, an interest rate rise could be in the offing very soon, followed by further interest rate rises in the future.

With this in mind, investors may want to consider locking in favourable interest rates now before mortgage costs rise.