Interest Rates Rise to 0.5% – What Does It Mean for Investors?

The Bank of England has officially raised interest rates to 0.5% as they continue to try and contain rising inflation. 

This follows the previous increase to 0.25% that occurred at the start of the pandemic and represents the first back-to-back increase since 2004.

While this rise was largely expected, many economists believe that rates could continue to climb to 1.25% before the end of 2022 in line with inflation. 

This demonstrates two things. Firstly, the Bank of England is maintaining its stance on not increasing rates at a rapid pace.

It does, however, show a clear attitude of action being necessary to combat rising costs. 

Forecasts suggest that interest rates could rise above 1.25% in 2023 but this remains speculation at these early stages.

But what does this mean for buy-to-let investors?

MoneySavingExpert.com suggests that variable rate mortgages will see a rise of roughly £12 a month per £100,000 with the rising rates, while they’ll be no change for fixed mortgages.

For investors, it’s important to consider that rising rental prices – and thus incremental increases to the rents – offer the opportunity to cover rising interest rates.

Ultimately, historic data also shows that the UK has been in this position before. 

Interest rates between 2000 and 2008 (pre-financial crisis) averaged between 4 – 6%, while property prices during this time increased by 119%. 

Then, we saw the global crisis hit and interest rates dropped to 0.5% as a result. 

While the crisis obviously had an impact on prices, between 2009 and 2016 UK property still continued to climb in value, translating to almost 32% growth over the same period.

It could be argued that inflation is the sign of a healthy economy and essentially, rising interest rates are a sign of natural market correction – a return to normality.  

Likewise, interest rates still remain at some of their lowest levels over the last two decades and while higher interest rates can have an impact on lending for homebuyers, the increasing popularity of ‘Generation Rent’ means the rental market remains buoyant.

Demand remains a key driver for the sector and we’re still seeing the positive impacts that nearly two years of intermittent lockdowns has had on the UK property market.

Finally, the importance of staying in the market long-term has never been clearer. Exiting the market pre-financial crisis would have resulted in a missed opportunity for many buyers, especially when markets such as London saw price increases north of 50%.

As always, this remains speculation and any investment decision should be performed with the support of a financial advisor.