Lower interest rates can make mortgage payments lower for UK landlords and could also improve rental yields.
Decreasing Interest Rates in the UK
In their most recent cut, the Bank of England has lowered interest rates to 4.5% – the lowest interest rate in 18 months following a 16-year high of 5.25%. It is expected that there may be further cuts in 2025 though at a more gradual pace.
What Does a Fall in Interest Rates Mean?
An interest rate is essentially how much it costs to borrow or how much reward you get for saving. When interest rates change, it also impacts mortgage, credit card and savings rates for millions across the UK.
The Bank of England changes interest rates in order to control inflation in the UK, with a goal of keeping inflation at 2%. In periods of high inflation, it might raise interest rates to bring inflation back down.
How Do Falling Interest Rates Impact UK Landlords with a Mortgage?
When interest rates drop, homeowners with variable-rate mortgages will experience lower mortgage payments. Lowering interest rates by a 0.25 percentage point equates to a saving of around £29 per month on mortgage payments.
For UK landlords who have a mortgage on their rental property, they could experience a period of lower mortgage payments depending on the type of mortgage they have. With mortgage rates having been higher in recent years, this could be a welcome relief.
It also means they could experience a higher rental yield as with lower mortgage costs, they are able to keep more of their rental income as profit.
What do Decreasing Interest Rates Mean for Rent Demand?
When interest rates are lower, it becomes easier to take out a mortgage as the cost of borrowing is lower. For the UK housing market, this could mean that more people may look to buy rather than rent. However, this is not an immediate effect.
The falling interest rates in the UK come after a period of high inflation and high interest rates. Tenants will not immediately stop renting in order to buy. Rental demand is likely to remain strong for the foreseeable future, especially in more expensive cities like London.
What Do Falling Interest Rates Mean for Those Looking to Buy-to-Rent in the UK?
With lower interest rates and cheaper mortgage payments, owning a property becomes more affordable for more people which can hike up property values. Although it may be more affordable to borrow, those looking to buy-to-rent may end up spending more on a property due to increased competition and higher property prices.
However, if mortgage interest rates continue to decrease, those investing in property could see a greater return on investment in coming months and good opportunities for resale.
How Will Falling Interest Rates Affect UK Landlords in terms of Rent Prices?
When interest rates fall, debts become lower. This could be a great thing for UK landlords as it translates to more financially healthy tenants. With lower inflation and decreased debt, tenants are more likely to pay rent on time and in full. It could also potentially be a time to raise rent, although this will need to be done with caution.
What Do Lower Interest Rates Mean for Rent Prices?
As interest rates drop, more people may choose to buy rather than rent – leading to a potential decrease in rent prices if there is less demand. However, as previously stated, this is not something that happens immediately.
Landlords can benefit from higher rental yields as well as increased property values so they could have a chance for greater return on investment right now.
With greater financial stability, tenant affordability might also increase. This means that their willingness to rent at a higher price may also increase. Depending on the situation and the property type, a landlord may find that it is a good time to increase rent price.
How Should UK Landlords Respond to a Fall in Interest Rates?
In the face of falling interest rates, UK landlords may choose to adapt their rental strategies. It could be tempting to raise the price of rent however they have to balance tenant interest with profit and ensure maximum occupancy. This is especially true for expensive and competitive markets such as London.
Working with a London property management company can help landlords guarantee tenancy and stable income, regardless of the fluctuating interest rates.
For professional property management advice and tenant sourcing services to prevent having to deal with rent arrears, speak to the J Property Management team today at info@jpropertymanagement.com.
References:
- BBC
- UK Property Accountants
- Reardons
