Investing in property during your professional rugby career may benefit you as the value of your holdings may increase over time. You might later sell your properties to fund your retirement or invest in a new business venture and start your second career. Alternatively, you could rent out your properties to generate an income and fund your lifestyle in retirement.
Yet, if you own property, you may have been affected by rising interest rates in recent years. Indeed, according to MoneyWeek, around 1.5 million households that need to remortgage in 2024 could see their payments increase by an average of £1,800 a year.
Fortunately, the Bank of England (BoE) reduced its “base rate”, which is the interest rate it charges other financial institutions, on 1 August. This could mean that mortgage interest rates come down soon, and this might affect your property investments in several ways if you have purchased using a mortgage.
Read on to learn why interest rates could fall and how it might affect your property portfolio.
Interest rates have fallen slightly, and could go further if inflation remains lower
Mortgage interest rates rose over the past few years largely because the BoE increased its base rate. This is the interest rate that the BoE charges to commercial banks and building societies. So, when the base rate increases, other financial institutions such as savings providers and mortgage lenders typically put their interest rates up alongside it.
The BoE decided to put the base rate up to control inflation after the Covid-19 pandemic and the war in Ukraine caused a spike in living costs.
By increasing interest rates, the BoE made borrowing more expensive, meaning consumers had less disposable income. Additionally, higher interest rates make saving more attractive. As a result, many households reduced their spending, which slowed price rises and brought inflation down.
Fortunately, according to the Office for National Statistics (ONS), inflation reached the BoE annual target of 2% in May 2024 and remained at that level in June.
Consequently, the BoE reduced its base rate from 5.25% to 5% on 1 August. While this is a small decrease, it could suggest that the BoE is confident that inflation will remain at its annual target, and it can further reduce the base rate in the future. Indeed, inflation rose only marginally to 2.2% in July, which could pave the way for further rate cuts.
This could mean that mortgage interest rates begin to fall soon too, and this may affect your property portfolio.
Here is how.
You may be able to find a more affordable mortgage and increase your profits
Mortgage interest rates rose sharply in recent years as the BoE increased its base rate. For example, according to Moneyfacts, the average interest rate on a two-year fixed-rate mortgage in December 2021 was 2.34%. This is based on a £200,000 mortgage with a 25-year term.
By December 2022, the average interest rate had increased to 6.01%, and rates have remained at this level, with the average rate for the same amount in December 2023 coming in at 6.04%.
As a result, monthly mortgage payments increased for many households. Indeed, the Office for National Statistics (ONS) reports that the average monthly payment on a semi-detached property in December 2022 was £481 higher than it was in December 2021.
These figures assume a property of the average UK value at the time, with a mortgage term of 25 years.
As a result, if you took out a mortgage to purchase your property, your monthly payments may have increased in the past few years. This could have affected profits from your buy-to-let properties. While you can increase the rent to cover some of the costs, pushing the price too high may cause tenants to move out and could make it more difficult to find new ones.
Consequently, the income you can draw from your property might have fallen.
Indeed, according to MoneyWeek, property investors have seen a 45% decrease in returns since the Covid-19 pandemic.
However, as interest rates fall, you may be able to find a more affordable mortgage in the future. This could mean that your property investments are more profitable than they are currently.
If your fixed-rate mortgage deal is ending soon, or has already ended, you may want to shop around and consider whether you can find a more favourable interest rate. Additionally, if you are on a tracker or variable-rate mortgage, you may see your interest rate fall soon.
The buy-to-let market could become more competitive
The interest rate cut could benefit you as it may mean that you can find a more affordable fixed-rate mortgage deal, or your tracker or variable mortgage interest rate falls. In turn, this may reduce your monthly repayments and improve your profit margins if you maintain the same level of rent. However, it could make the buy-to-let market more competitive for several reasons.
First, if mortgage rates fall, the barriers to entry into the market are lower. Additionally, buy-to-let properties may be a more attractive investment because the profit margins could be higher. As such, you may find that more investors purchase properties and rent them out.
Further to this, cheaper mortgages could make it easier for first-time buyers to get onto the property ladder. Additionally, the new Labour government has committed to building 1.5 million new homes, giving first-time homeowners priority over other buyers.
The government will also create a “Freedom to Buy Mortgage Scheme” to ensure the availability of affordable mortgages, though they have not released the full details of this.
Consequently, demand for rental properties may fall slightly in the future if it becomes easier to buy homes. Depending on the area of the country where your properties are, you could find that increased competition and falling demand push average rents down. This could dampen your profits, to some extent.
That said, overall demand for rentals remains high and your buy-to-let property may still be a beneficial investment. Indeed, in their June 2024 rental market report, Zoopla revealed that, although demand had fallen 25% in the past year, an average of 15 tenants still applied for every rental property.
Also, if you are considering expanding your portfolio, you may find it easier to do so as interest rates fall.
While you may be concerned about how changing interest rates could affect your portfolio, it is important to consider your long-term financial goals before making any decisions about your investments.
Get in touch
If you would like to explore different investment options, then please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
The Financial Conduct Authority does not regulate buy-to-let (pure) and commercial mortgages.
Equity release will reduce the value of your estate and can affect your eligibility for means-tested benefits.
