New Interest Rates to be announced be Bank of England


Neil Simpson is a former Personal Finance Journalist of the Year and the author of the Buy-to-Let Investor column in Financial Mail on Sunday. He is a keen property investor and writes about buy-to-let online as well as for a variety of publications including City AM.

A new Bank of England interest rate announcement is due within days and several lenders are still working out exactly how to respond to the last one. When base rate went up in July many took several weeks to decide how to re-price their fixed and variable rate offers. More dragging of heels is likely if rates go up again in August, though my bet is that the next increase won’t come quite this soon.

Either way it is clear that several banks and building societies are using the cover of rate rises to boost their profits. They are doing this in several very sneaky ways – so this summer it’s going to take even more shopping around than usual to get the best deals.

Cynically enough the lenders have decided to hike their fixed rates by far more than their variable deals. Why? Not because it’s started to cost them more to offer these loans. The ‘swap rates’ they use to borrow long term money have long since taken July’s rate rise into account. No, the lenders know that more borrowers than ever want to fix, so they can make lovely fat profits by increasing the margins on the deals.

That’s why some have increased two, three and five year fixes by up to 0.4 per cent in the past month. Not bad when base rate went up just 0.25 per cent. The lenders reckon we’ll still jump to fix because pessimists are still saying we could get up to two more rate rises by the end of this year. That would take base rate to 6.25 per cent. Even if we only get one further rise the consensus is that rates aren’t going to go back down any time soon. So fixing still makes sense, right?

I’m not so sure. If you are a hard-up first-time buyers with a residential loan then yes, fix away because security matters. But us buy-to-let borrowers? We should have fixed last time our loans needed re-mortgaging when rates were much lower. This time around I reckon it’s worth looking at discount and tracker deals. A gap is suddenly opening up between the rates on these and on fixes. If I was re-financing myself and as long as my finances could stand another 0.5 per cent rise then I’d go for a variable deal in the hope that even if that second rise does come it is still many months off, so I can enjoy lower payments for a little longer.

Take a look at the best-buy charts here on the Landlord Mortgages site and elsewhere if you want. That will give the most up to date picture of the gap between discount and fixed rate deals. If you speak to a broker you may find there are still some good exclusive fixes to choose from. But I reckon we’ll all have to act fast to get them.

The other reason why I’d be more likely to go for a discount deal right now is that I reckon rents really are going to see something of a lift over the next year. That means at least one more base rate rise should be affordable. Birmingham Midshires is the latest to come out with some optimistic research on all this. Its figures say the average nationwide rental yield is now 5.5 per cent and that in the year to June the average total return on buy-to-let property was 13 per cent. The average rent is now £651, nicely up from £623 a year ago. And the bank’s economists say there is an ‘encouraging’ potential for further rent increases in the near future – not least because a lot of hopeful first-time buyers might have to stay renting for a bit longer now property prices look uncertain and mortgage costs have got so much higher.

For information, Northern Ireland, Scotland and the South East have done best for buy-to-letters over the past year, according to Birmingham Midshires. The East Midlands has been the least lucrative region, though property investors there still got an average annual return of 10 per cent. I can’t see many pension funds or savings accounts beating that. Finally the BM research also confirms another investment trend. Terraced houses continue to be the best performing property types. New build two bedroom flats continue to be troublesome. In much of the country it’s the same old problem of too much supply and not enough demand. It’s not just on mortgages that we need to choose carefully for 2007’s best buy-to-let opportunities.