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This rate hike could hit landlords hard

The shock decision by the Monetary Policy Committee to raise the base rate by 0.25% is bound to still be on everybody’s lips this week. The increase will not make a big difference to most home owners but it can’t be taken in isolation.

This is the third quarter point hike in six months and the cumulative effect is bound to be pronounced, particularly in view of the January rise being an unexpected one.

It is easier for people to deal with a rate increase and subsequent rise in mortgage payments when they have steeled themselves for it. Surprise allows the seed of doubt to germinate and heighten borrower concern.

So much relies on confidence and with Nationwide reporting a second consecutive fall in its house price index this month even before the rate rise, this is unlikely to improve. It’s likely that the housing market will dampen as a result of this latest blow.

But what other effects will the increase bring? The most immediate impact has been on fixed rates. The City reacted badly to the rise and swap rates went up, provoking swift action from a number of lenders.

While at the time of writing there are still a number of fixed rates under the 5% mark, they are in severe danger of being withdrawn. Brokers must handle client expectations carefully and instill some urgency to avoid disappointment, particularly as fixed rates will remain popular.

And buy-to-let investors will not be pleased about the rate rise. It will put more pressure on rental yields and there is the risk of mortgage payments needing to be subsidised from other funds.

As borrowing levels have become harder to achieve in the face of rising interest rates, lenders have relaxed criteria and driven down pay rates to accommodate borrower demand.

GMAC-RFC’s recent launch of a three-year tracker is a good example. This offers an initial rate of 5.24% and a rental assessment at 100% of the interest at the pay rate.

The deal reverts to 0.99% above base for the remainder of the loan and carries an early repayment charge for the first five years. The average rate over the lock-in period is reasonable but rising rates highlight the fact that landlords stretching their borrowing through generous criteria face the risk of their property failing to wash its face further down the line.

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