As the rate of inflation in the UK fell to 0.8% in April, the Bank of England refused to rule out reducing interest rates below zero to kick start the economy. But would this ever happen, and what would it mean for property investors?
It’s not likely, but it can happen
Negative interest rates are usually employed when people stop spending, businesses stop making profits, and the economy cannot grow. Clearly, the very conditions we are experiencing today. But there are two schools of thought on this issue. Some believe the recent inflation figures are merely a short-term blip in the face of a sudden drop in oil prices and paralysis of the global economy. Others think we are heading towards longer-term deflation, and the Bank of England will be forced to reduce interest rates further to resuscitate the economy.
Employing negative interest rates is not very common, but it has been more widely known in recent years. Sweden’s central bank cut their interest rate to -0.25% in July 2009, and the European Central Bank (ECB) dropped theirs to -0.1% in 2014 in a desperate attempt to kick-start the economy and devalue the currency to make their products attractive to foreign investors. Other European countries and Japan have since followed suit.
What would negative interest rates mean for mortgages?
In theory, negative interest rates could lead to mortgage lenders offering loans with a negative rate. This would mean the amount you owe each month falls by more than the amount you have repaid. It sounds too good to be true, but it does happen. Mortgages with negative interest rates went on sale in Denmark last year.
The trouble is that negative interest rates can also stifle lending if banks feel it is impacting their profit margins, and banking customers withdraw their savings, preferring to keep their money ‘under the mattress’. So, while the rates are great, you may find it hard to get a loan.
Longer-term fixed rates could be the answer
If you are thinking of buying an investment property, and you have a good deposit, we are already seeing some great deals on fixed rate buy-to-let mortgages – some as low as 1.9% fixed for 5 years. Rather than waiting to see if rates decrease further, we think locking into one of these deals now makes better sense, while lending is still available.
Mortgage agreements last between 3 and 6 months, so you can get your finances in order in advance of finding your property. It looks like we will be gifted a buyers’ market for the next few months at least, so it’s good to be in a position to take advantage of any opportunities.
Five to ten-year fixes are also a good idea if you don’t think you will need to release capital from your property in the immediate future. With so much uncertainty surrounding the economy, an inflation shock is not out of the question, which could lead to a rise in interest rates. If you fix your loan lower for longer, this makes rising interest rates less of an issue, but you can increase rent in the face of rising inflation.
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