Learning from history on interest rate rises

Interest rate rises are causing some uncertainty in the market right now, but taking a longer view can bring some much- needed perspective to the outlook.

The current Bank of England base rate was recently increased to 5.25%, after being raised 14 times in a row on the advice of the Monetary Policy Committee. This action was taken in direct response to the UK’s stubbornly high inflation, which has taken longer to begin to come down than many had forecast. That being said, there are now glimmers of hope on the horizon, with inflation finally beginning to fall behind pay growth.

Interest rate rises are certainly not to be ignored by the thousands of mortgage holders who are set to see their monthly expenditure on their borrowing costs significantly increase in some cases, if it hasn’t already. However, as most experienced property investors would agree, it is important to step back and be aware of the bigger picture when deciding on your investment options.

A history of interest rates

Until very recently, borrowers had enjoyed around 15 years of very low interest rates, which came off the back of the 2007-2008 financial crisis. This saw the base rate drop to its lowest level in around 300 years, from 5.75% in July 2007 to 0.50% in March 2009. Interest rates remained extremely low over subsequent years, with a few small fluctuations along the way, and finally fell to a historic low of just 0.10% in March 2020 as Covid began to sweep across the UK.

During this time, buyers and investors made hay when it came to maximising their borrowing and investment options. However, lenders’ borrowing criteria also became more stringent, tempering the level of risk involved in the leveraged property market. Meanwhile, after a short-term dip during the worst of the financial crisis, UK house prices have risen exponentially over the past 15 years, which has further impacted the investment landscape.

Looking beyond this 15-year history, though, interest rates have historically held at much higher levels than we are currently seeing. Back in 1979, for example, as the UK struggled to control its rising inflation, rates hit 17%, and a similar sequence of events in the 1990s saw rates rise to 10% and then to 15% in quick succession, before being brought back down again. The average interest rate between 1990 and 1999 was 7.39%.

The new normal

While most forecasts predict that interest rates will begin to come down once inflation levels are stemmed, it seems likely that what we are experiencing now is the ‘new normal’. As Knight Frank pointed out back in December 2022, as the current interest rate rises were setting in, it is “extremely unlikely” that rates will return to the low levels we had seen over recent years. It is therefore important that homebuyers and investors alike take this into account when making decisions on future purchases, rather than waiting for sub-1% rates to return.

For many buy-to-let landlords, this is already leading to a greater emphasis on a property’s prospective rental yields, rather than its capital appreciation prospects. This is because higher borrowing rates create higher monthly outgoings for those who are not cash owners, impacting returns. Ensuring you purchase property in an area with high tenant demand where rents are strong is therefore increasingly important.

Seasoned investors are also future-proofing their investments by negotiating hard on asking prices, or taking advantage of the deals we have already negotiated with developers and vendors, such as this HMO opportunity offering yields of around 15%.