Will rents rise to match interest rates?

For the last number of years interest rates have been at an all-time low and so have repayments. But as the interest rates rise, will this impact on the profit margin of buy-to-let portfolios? Surely, the profit margins will reduce.

Rents won’t rise to match interest rates directly, but they may indirectly. Rents are largely a function of earnings. The ability and willingness of people to pay more rent tends to be associated with people earning more. That in itself, doesn’t have anything to do directly with interest rates.

If interest rates go up your mortgage or property loan gets more expensive, but it doesn’t mean that landlords can take the view that as their profit margins are being squeezed, they can therefore put the rents up. It may be that if you have a tenant in your property already, they’ll accept that and so it will be. But, in the market at large, there’s no reason why tenants or potential tenants would be willing to pay more purely because your profit margin has reduced. Therefore, the answer in that sense is definitely “no”. However, indirectly you’d expect interest rates to be increasing if the economy is doing better, because interest rates tend to be lowered to help the economy out when it’s struggling. And raised to cool it down when it’s doing almost too well. And in a situation where the economy is doing well, you’d expect people’s wages to grow - along with your ability to charge higher rents. So, there is an indirect link.

As a property investor, you need to be aware that your profit margin can change over time, and you need to be able to survive higher interest rates - even if you don’t like them!

Fortunately, this is pretty much done for you these days when you take out a buy-to-let loan, the lender will stress test it at a far higher rate of interest than we currently have. So, you should be able to survive rates going up, even if you don’t want them to. And you also need to bear in mind that interest rates aren’t going to affect you immediately, in fact they may not affect you at all. Why? Because if you are on a fixed rate mortgage whatever happens to interest rates won’t affect you until the end of your fix, so if this is what you’re concerned about you can fix for longer to have more certainty. It may not affect you at all because the Bank of England base rate is only one component of what goes into determining how much lenders charge you so they may take a hit on their own margins to keep rates low even if the base rate goes up.

All in all, you are right to be considering this as part of your property investment strategy, but if you’d like to discuss this or any issue around your property investment strategy, just contact us and let us know what you’d like to talk about. We’d be only too happy to help.