While the interest rate increased from 0.25% to 0.5% in November last year, it still at one of its lowest values in history and is highly-favourable for potential homeowners who are trying to get their foot on the housing ladder. While the marginal change in the interest might have some consumers tightening their belts slightly, historically 0.5% is still one of the lowest interest rates the British home buyer has had to endure.

From 1971 until this year the interest rate in the UK has averaged 7.59%, reaching an all-time high of 17% in November 1979 and the record low of 0.25% in August 2016. In July 2007, the official bank interest rate was 5.75%, which means that from that date up until November last year, the bank’s base interest rate had dropped by 5.5%. Even with the 0.25% increase, homeowners who purchased their property with a mortgage within the last decade are paying less for their home now, than they did when they first bought it. Bearing in mind that banks will generally grant mortgages at an interest rate around 2% to 3% above the base rate, on a repayment mortgage of £200,000 over a period of 25 years at 7.75% (base rate of 5.75% plus 2%), the monthly repayment would have been £1,511 with a total repayment of £453,149. The same mortgage at an interest rate of 2.5% (base rate of 0.5% plus 2%) would cost £897 a month with a total repayment of £269,204.

While there are markets such as prime central London, where the majority of home sales are cash buyers, for the most part, prospective homeowners around the country are dependent on mortgages to purchase a property. A low-interest rate will help build consumer confidence and increase their chances of getting into the market. High-interest rates widen the gap for prospective homebuyers to meet the necessary criteria that mortgage lenders require for the applicant to obtain the finance. They also mean that applicants may have to opt for a lower mortgage amount, which could result in them having to choose a smaller home or perhaps one outside of their ideal location. Very often, high-interest rates push lower-income earners out of the market completely.

Another advantage of the current favourable interest rate is there may be some room in  consumer’s budgets to pay extra into their mortgage to reduce the term of the loan and pay the property off faster. This will, however, depend on the lender and their policies and fees with regard to overpayment. Most lenders will allow homeowners to overpay 10% per year if they are still in their introductory fixed, tracker or discount period. Usually, once this period has passed, you will be able to overpay as much as you want, but again this depends on the lender and their policies, so best to clarify beforehand.

At the moment the UK is among the top fifteen countries in the world with the lowest interest rates. While there are talks of the interest rate going up in the future, for the time being, UK citizens should make the most of the current circumstances and place themselves in the best possible position to get into the property market.


Factors that will influence the property market in 2018

It is fair to say that 2017 was a year of much change in the housing market, from the abolishment of Stamp Duty for first-time buyers who are looking to purchase a home up to £300,000, to the new way that landlords will be taxed on their portfolio. One thing is for certain, and that is that the government is doing all they can to ensure that everyone has an opportunity to own a home for the first time. The year was geared towards encouraging first-time buyers to get in the game while getting landlords to rethink their portfolios and perhaps releasing some of their current properties into the market.

Here’s a brief look at the things that happened in 2017 that will influence the market in 2018:

Stamp Duty done away with for first-time buyers

The government’s decision to scrap Stamp Duty for first-time buyers who wish to purchase a property up to £300,000 was one of 2017’s biggest changes in the housing market. In addition to the exemption, rates have also been changed. Now, first-time buyers making a property purchase up to £500,000 will pay no Stamp Duty on the first £300,000 and 5% tax on the amount between £300,001 and £500,000.

New taxing for landlords

Last year also saw the introduction of the section 23 taxation change that will impact landlords. The change will be phased in until 2021 and will mean that landlords will not be able to claim tax relief on their mortgage payments from 2021, reducing by 25% each tax year until then. The change will effectively push landlords into a new tax bracket, which will essentially eat away at potential profits.

Interest rate has gone up

For the first time in a decade, the base rate of interest has increased marginally from 0.25% to 0.5%. The increase means that mortgage repayments will be slightly more expensive going forward.

A change in the rental landscape

Over 2017, the build to rent sector has seen growth, which has created an alternative type of accommodation for tenants. Many of the build to rent developments are owned by institutions such as pension funds and are then let out by letting agencies. At the moment, approximately 55,000 build to rent properties exist in London. Depending on the development or site, the developments offer residents features such as gyms, communal areas and other sought after amenities.

House prices are steady

In spite of both the economic and political challenges of Brexit, 2017 showed that the London property market is robust and house prices have remained steady. According to the UK House Price Index, the yearly average house price growth is up to 5% with 29 of the 32 boroughs in London showing house price growth since January 2017. Steady property prices, favourable interest rates and an increase in inventory are positive factors for buyers in today’s market.

An increase in affordable housing

According to recent budget announcements, the UK government will be focused on increasing the number of affordable homes available to buyers. A commitment has been made by the government to build more affordable housing, designating £44 billion to build new homes, with an additional £400 million to improve existing estates.
Approved schemes will also be pushed ahead as soon as possible to help relieve some of the pressure currently placed on council waiting lists.

With all this change during 2017, it will be interesting to see what we can expect of the next twelve months.

How the interest rate hike could impact the property market

The Bank of England Governor, Mark Carney announced in November 2017 that the interest rate would increase from 0.25% to 0.5%. This marks the first time in a decade that the central bank has hiked the rates, which are currently at historic lows.

The rate hike is likely to place further pressure on the market as mortgage costs go up and lending conditions become further constricted.

While rate hikes will have a lesser impact on those who have the cash to purchase a property outright, existing mortgage holders and potential buyers wanting to get their foot in the door will be hardest hit. According to Zoopla, the average price paid for a home in London is £621,881. Under the previous prime interest rate of 0.25%, the mortgage repayment over a 25 period was £2,139. With the hike to 0.5%, the monthly mortgage repayment will increase to £2,205 per month, which means that homeowners will pay a further £20,036 on interest over the term of the loan.

Based on the example, an increase in the monthly mortgage repayment of £66 a month is not substantial. However, it is the compounded effect of a rate hike on all other debt that the homeowner is currently servicing. Many people have high debt levels because interest rates have been so low for so long. As interest rates rise, it will be more and more difficult to service the debt and other household payments. Added to this, if we enter into a rate hiking cycle, we may see more than one increase.

Another effect is that it will be more difficult for potential buyers to show the necessary affordability levels to get their foot on the first rung of the property ladder. Higher interest rates mean that buyers will qualify for lower mortgage amounts. Essentially this means that they will require a larger cash deposit to be able to afford the same property. Before any further rate increases occur, potential buyers should focus on paying down their debt and building as much savings as possible.

Top tips for investing in property

Over the long term, property has proven itself to be a solid asset class in which to invest. However, there are aspects that property investors need to consider before they make a final decision and sign on the dotted line.

Much of property investment success is based on the decisions made at the start of the investment. If possible, it is best to try and make your money right from the start of the deal. How is this possible? By finding properties that are listed at values below market value. To know whether a property is below market value requires investors to do their due diligence and research.

Look online

Where do you start? Before going to see a property look it up online and read the agents or seller’s comments regarding the property’s condition and its construction. Also, see how long the home has been on the market and whether there have been any other interested parties who have possibly made an offer. Knowing the seller’s position is also an advantage, as it provides insight into how open they are to negotiation.

Compare apples with apples

Once you have this information, look for other homes within proximity that have recently sold and for how much. Find similar homes that have sold within the past year, ideally no further than a mile away from the home you are looking at. Start with properties on the same road and work out from there. Having an idea of the pricing in the area will provide perspective as to what would be considered a fair market value of homes in the vicinity.  Also, look at the current rentals in the area, particularly if the home is being purchased as part of a buy-to-let portfolio – this will provide insight into the possible expected rental income.

Google Streetview

A great tool to view the surrounding properties and neighbourhood is Google Streetview. From the comfort of your home, you will be able to get an idea of the amenities in the nearby area, as well as the overall look and feel of the neighbourhood. While they may not be completely up to date, the online images will provide you with a picture of where the property is situated in relation to the town centre, main roads and public transport.

Council information

Another excellent resource is the area’s council planning portal, as this will provide a planning history on the property. Knowledge of any failed plans will give you valuable insight into what may or may not be done to the property to add value.

Purchasing investment property can be a highly lucrative endeavour provided the research is done, and the investor goes into it with their eyes open.