Interest Rate Cut: What It Means for Property Investors and Developers

The Bank of England (BoE) has announced its first interest rate cut since 2020, reducing the Base Rate to 5% this month, a decrease of 0.25%. This marks a significant shift after 14 consecutive rate increases, with the Base Rate at 5.25% since August 2023. The reduction carries significant implications for property investors, particularly those purchasing at auctions. Here’s how this change can impact your investment strategy and opportunities:

Economic Context

The BoE has been adjusting rates to combat high inflation, which exceeded 10% in early 2023, far above the government’s 2% target. By June, inflation had fallen to this target and remained stable in July. Market expectations were split between maintaining the rate or a 0.25% cut, reflecting concerns over persistent service inflation in areas like hospitality and culture.

Impact on Mortgage Rates

Earlier this year, a surge in inflation led to rising mortgage rates through spring. However, mortgage rates have stabilised, with inflation returning to the 2% target. The recent positive economic signals and competitive mortgage market have accelerated rate reductions. For instance, the first sub-4% mortgage rate in months has appeared for borrowers with more extensive deposits, with more lenders expected to follow.

The average 5-year fixed rate has decreased from 6.08% in July 2023 to 4.87%, and the average 2-year fixed rate from 6.61% to 5.25%. Weekly updates on average mortgage rates for various terms and deposit sizes are available for more precise information.

Current Mortgage Implications

Changes to the Base Rate affect loan interest, including mortgages. For those on fixed-rate deals, monthly payments remain unchanged until the deal’s end. Tracker or variable rate mortgages tied to the Base Rate will see a reduction in payments due to this cut.

If your fixed-rate mortgage is nearing its end, consider using a mortgage calculator to understand borrowing potential or apply for a Mortgage in Principle for a personalised assessment. The Mortgage Charter, launched in July 2023, encourages lenders to offer new deals up to six months before the current rate ends, helping those nearing the end of their fixed rates.

So how will this affect those who purchase at auction?

Lower Financing Costs

Reduced Mortgage Rates: With the Base Rate cut, mortgage rates are expected to decline, making borrowing cheaper. For investors using mortgages to finance auction purchases, this means lower interest payments and potentially improved cash flow.

Increased Affordability: Lenders’ affordability assessments, which consider higher stress test rates, may ease. This could increase your borrowing capacity, allowing you to bid on higher-value properties or secure financing more easily.

Improved Cash Flow and ROI

Better Returns: Lower interest rates on mortgages can enhance your return on investment (ROI). Reduced monthly payments improve cash flow, making rental properties more profitable and attractive as long-term investments.

Refinancing Opportunities: If you already hold investment properties with higher-rate mortgages, refinancing at a lower rate could significantly cut costs, freeing up capital for additional investments.

Increased Market Activity

Competitive Bidding: As financing becomes more affordable, more investors might enter the auction market, potentially increasing competition for desirable properties. Be prepared for higher bids and consider setting a firm budget.

Market Growth: Lower interest rates can stimulate overall market activity. Increased property demand can drive price appreciation, benefiting investors through capital gains.

Strategic Considerations

Time to Lock in Rates: With the Base Rate on a potential downward trend, it might be wise to secure financing soon. Locking in at a favourable rate now can protect you from future increases if market conditions change.

Diverse Investment Options: Consider diversifying your investment portfolio. Explore different property types (residential, commercial, mixed-use) with cheaper financing to balance risk and reward.

Due Diligence: Despite favourable financing conditions, thorough due diligence remains crucial. Evaluate property conditions, market trends, and potential rental yields to make informed investment decisions.

Preparing for Future Changes

Monitoring Market Trends: Stay informed about BoE decisions and economic indicators. Understanding future rate changes can help you time your investments and refinancing activities for maximum benefit.

Flexible Strategies: Develop flexible investment strategies that adapt to changing interest rate environments. In your planning, consider both short-term gains and long-term sustainability.

Affordability and Future Rate Movements

Lenders’ stress tests, used to determine mortgage affordability, are based on Standard Variable Rates (SVRs), typically the lender’s SVR plus 1%. Mortgage affordability could improve with SVRs potentially lowering in line with the Base Rate cut.

The BoE’s Monetary Policy Committee meets every six weeks to review interest rates. Historically, after rising rates, a flattening period precedes a downward trend. While significant drops to historic lows seen in 2021 are unlikely, the Base Rate is expected to edge downwards through 2024 and into 2025, with markets forecasting another 0.25% cut by year-end, subject to broader economic conditions.

The next interest rate decision will be announced at noon on 19 September 2024.

Conclusion

The BoE’s interest rate cut opens up numerous opportunities for property investors at auctions. Lower borrowing costs, improved affordability, and enhanced returns make this an opportune investment time. However, increased competition and the need for careful market analysis underscore the importance of strategic planning. Stay informed, act decisively, and leverage these favourable conditions to maximise investment potential.