The Bank of England introduced four measures last week aimed at mitigating the negative economic effects of the referendum result. The headline grabbing cut in the Bank of England base rate from 0.5% to 0.25% is the first since 2009. This will have a marginal effect on borrowing costs, but the bank is determined that lenders will pass it on and is providing them with £100 billion called ‘term funding’ provided they do pass on the cut to encourage them to lend. The bank hopes that a reduction in interest rates will encourage consumer spending and lift some of the post referendum economic gloom. The bank will also buy £10 billion of corporate debt, £60 billion of government debt and extend quantative easing for the first time since 2012 by £60 billion. All eyes are now on the Chancellor’s Autumn statement to see if he will reduce business taxes and potentially VAT.
So what does this mean for landlords and property investors? Even cheaper mortgages is the most obvious impact. The cheapest 2 year buy to let trackers are likely to fall to around 1.5%. I ran a quick assessment of my portfolio yesterday. About half of my products are trackers so will automatically fall by 0.25% but I have one fixed rate and the rest are discounts from the standard variable rate (SVR). Many banks and building societies still have SVRs of around 5% and any reduction is at their discretion. I suspect we will see reductions of less than 0.25% from many.
Now is a fantastic time to review your mortgages. Consider switching products with the same lender, many are getting much better at offering existing customers competitive products. If you have a good credit score and can show earnings of at least £25,000, you should not be paying more than 2% at 65% loan to value or 2.5% at 75% loan to value for residential buy to let mortgages unless there is some specialist issue, like it’s an HMO or there is a commercial element.
The Bank was pretty gloomy about economic prospects, predicting the economy will now be 2.5% smaller by 2018 that if the remain campaign had won the referendum. The governor Mark Carney predicted that 250,000 people would lose their jobs and unemployment would rise from 4.9% to 5.8% in 2018. Earnings are likely to grow more slowly at 3% per year and economic growth next year will be 0.8% instead of 2.3% as predicted before the referendum. It also expects “a period of heightened uncertainty and weakness in property markets and that the average of Nationwide and Halifax price indices is expected to decline a little over the next year.” The interest rate cut will probably encourage more people to buy and therefore prevent prices from falling more than that. If the chancellor, Phillip Hammond, were to remove the 3% stamp duty surcharge on additional purchases we could see more movement in the market and I think this could be on his radar.