Should I Invest in Property When Interest Rates Are High?

Posted on 12th October 2023

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So, you’re thinking about investing in a buy-to-let property, but you’re put off by rising interest rates. You’re scared of risking a substantial amount of capital on an investment that may not pay off.

Don’t worry – these times of financial uncertainty may actually benefit beginner and experienced property investors.

While low-interest rates seem to be a thing of the past – for now at least – the benefits of UK property investment remain the same. That being said, investors still face some challenges within this ever-changing financial landscape. However, if you take a long-term approach, the buy-to-let property market still offers opportunities for investors to thrive.

What Are the Most Recent UK Inflation Rates?

In turn, high inflation has forced the price of everyday items and other expenses to rise. In addition, stock markets have become an even more volatile environment. However, the property market has performed well when faced with high inflation historically, making brick-and-mortar investments a less risky alternative for growing your capital.

How Has High Inflation Affected Interest Rates?

The Bank of England has strategically leveraged the tool of raising interest rates to achieve a substantial reduction and sustained control of inflation. However, this is no quick fix; it’s a gradual process that typically unfolds over a span of up to two years.

In essence, the efficacy of heightened interest rates lies in their ability to curtail spending within the United Kingdom, in contrast to a scenario where rates remain unchanged. This orchestrated reduction in overall economic expenditure plays a pivotal role in slowing down the rate of price hikes, subsequently leading to a decline in the UK’s inflation rate.

Furthermore, the impact of elevated interest rates extends beyond domestic borders, exerting an influence on the pound’s valuation relative to other global currencies. This shift in exchange rates tends to drive down the costs of foreign-imported goods, a key driver in the overarching campaign against inflation. There are Property Market Forecast for London reports available online, which are very useful for investors to learn more about the sector.

In conclusion, the recent surge in interest rates is a proactive measure by the Bank of England to rein in inflation, and its multifaceted impact underscores its role as a catalyst for reshaping both domestic and international economic dynamics.

Currently, UK interest rates stand at 5.25%. It is also worth mentioning that mortgage lenders will have significantly higher interest rates than the current Bank of England figures.

Are Interest Rates a Cause for Mortgage Concern?

According to Taylor Wimpey – one of the country’s most prominent housebuilders – the Bank of England’s interest rate hike has made home ownership less affordable, as investors turn to longer mortgages to offset substantial borrowing costs. First-time buyers opting for mortgages over 36 years tripled to 27% since 2021, while second-time buyers with mortgages exceeding 30 years rose to 42% from 28% in 2021.

Higher Interest Rates Mean Lower House Prices

However, it’s not all doom and gloom.

One of the biggest plus points of soaring interest rates is that housing prices will fall. When the cost of borrowing increases, residential buyers are less likely to invest in property, especially when they need to watch other household finances due to high levels of inflation.

The latest house price data, freshly released on GOV.UK by HM Land Registry (HMLR), paints a revealing picture of the UK’s housing market in May 2023. The provisional estimate indicates an annual inflation rate of 1.9% for average UK house prices over the 12 months leading to May 2023. We recommend reviewing the latest UK interest rates chart for some additional insights into the trends in property investments.

This figure marks a notable decrease from the revised 3.2% estimate observed for the 12 months ending in April 2023, as well as a significant drop from the peak of 14.1% annual inflation recorded in July 2022. As of May 2023, the provisional average UK house price stands at £286,000—£6,000 higher than the previous year, yet £7,000 shy of the peak figures from September 2022.

Beat Rising Interest Rates by Investing in Off-Plan Properties

An effective strategy for sidestepping the need for a buy-to-let mortgage and the challenges of mounting interest rates lies in the realm of off-plan property investment.

Off-plan property refers to real estate that is currently under construction or in development, providing a unique opportunity for investors to acquire units within upcoming properties prior to their availability for tenants.

Due to its developmental stage, off-plan property often enters the market at prices below its projected market value. This presents an advantageous chance to secure pristine units at significantly reduced costs, potentially circumventing the necessity for buy-to-let mortgages altogether.

For those who seek to manage their investment expenses over time, many off-plan properties offer flexible payment plans that enable gradual payments across various developmental milestones. In some instances, this might involve reserving a unit within an off-plan development with as little as a 20% down payment.

Embracing the off-plan property route empowers investors to distribute investment expenses, eliminating the burden of a substantial lump sum payment. Furthermore, this strategic approach effectively shields investors from the escalating interest rates associated with buy-to-let mortgages.

So, Should You Still Invest in Property?

As you can see, property investment faces some new hurdles thanks to rising interest rates and a cost of living crisis brought on by high inflation. However, investors can still explore other avenues – such as off-plan properties – to grow their capital amidst an unprecedented financial landscape. Remember, property investment always comes with risk, but with the right due diligence and help from a quality property investment company, investors of all experience levels can develop and surpass their investment goals.