Mike Collins, financial advisor, answers questions

Since December 2021, the Bank of England raised interest rates seven more times. The current housing market is experiencing major changes as they are now at their highest level in 14 years. Property investors and landlords can be affected by rising rates.

Are higher interest rates affecting the housing market?

Mike: It is still difficult for first-time buyers to get on the property ladder because of rising property prices. People are finding it difficult to move, let alone purchase their first home, due to a rise in house prices and a lack of homes available since the pandemic.

It still seems like there is a race to space. This started with the pandemic, when people realized they needed more space indoors and outdoor.

But, if interest rates continue to rise, it is likely that landlords will not make money and be unable to pay the higher tax or higher interest rate on their mortgages.

But, people need to rent if they are able to afford it. However, if they cannot afford to rent, then that is a problem for both the individual and for economic growth.

Are we likely to see tighter property investment conditions after the latest rise in prices?

Mike: Rising interest rates are a problem because mortgage rates go up, which in turn increases borrowing costs. Variable mortgage holders may need to notify tenants in order to raise rental prices to reflect new costs.

Investors who seek the best mortgages to purchase new property will not be able achieve the same results as last year. This causes tightening in net yields.

Inflation is also at its highest point in 40 years, a result both of rising energy costs and higher living costs. This year will be tough for landlords, with net rents dropping and rental returns weak.

Is inflation good for property investors?

Mike: If you have debt, inflation can have some positive points. Investors need cash to invest. A 75% LTV mortgage would be a good option. With a 0% interest-only loan, you will still have to pay the interest in 20 years.

The mortgage amount will not change if the property’s value triples. You would need to sell the property to make capital gains (unless it was your home), but you would still have enough money to pay off the mortgage and have plenty of cash left. This could also indicate that you have extra cash available to pay off any other BTL mortgages.

Higher interest rates are one of the risks, but you can still try to get the best fixed term mortgage.

What does the future look like for the property market in 2023?

Mike: It is possible that interest rates will rise further as inflation continues to rise. Investors are advised to lock down fixed-term rates as long as possible.

Rates rising are a problem because fewer people can afford move or purchase a home for the first time. This can lead to house prices dropping. Real values could suffer if house price growth slows down to a moderate level while inflation continues rising.