Rising interest rates and end of TFS brings only one certain winner – Goodall

by: John Goodall, CEO and co-founder of Landbay
  • 27/03/2018
  • 0
Rising interest rates and end of TFS brings only one certain winner – Goodall
The Bank of England’s Term Funding Scheme (TFS) came to an end on the 28th February, concluding a stream of cheap funding for UK banks that first began back in August 2016. But who will the eventual winners be?

The end of TFS will likely result in a rise in the cost of funding for banks, and therefore a rise in mortgage rates over the course of the next six to nine months as borrowers pick up the increased cost of capital.

To add to that, inflationary pressures mean that bank rate is likely to rise by another quarter point before the summer, and maybe even one or two additional rate rises later in the year.

This is, of course, positive news for savers who have had to put up with virtually zero return on their deposits over the last few years.

For landlords however, they’ll be holding tight to see how this might also impact mortgage rates.


No short-term winners or losers

While the quick succession of potential interest rate rises would have a profound impact on savers and landlords alike, the superseding rate of inflation will serve to dampen any significant win or loss.

Inflation is still running at around 3% and any interest rate rises will mean little in real terms.

This means that savers are guaranteed to lose, not grow, their money if they put it into a bank account.

While I expect nominal interest rates to rise more than some predict, they will not hit 2.0% this year meaning that, in real terms, they will remain negative.

So, while savers shouldn’t rejoice just yet, they can at least welcome a movement towards rate normalisation.


Landlord impact

As for landlords, issues surrounding borrower affordability will not be as stressed as many may have first thought.

A significant number of landlords will have moved onto fixed rates (and increasingly five-year fixed rates), so it won’t feed through into increased payments anytime soon for many.

Moreover, rents across the country are on the up.

According to our January Rental Index Report, rents across all nine regions of the UK, including London, grew for the first time in almost two years.

In February, the situation was much the same, with the East Midlands leading the way with an average year-on-year growth of 2.24%.

Rising rents across the UK ultimately reflect the country’s lacking supply of available properties to rent, matched with the growing cohort of people that can’t buy, or don’t want to, relying more than ever on the rental sector to house them.

This is serving to push rents up even further, helping boost the affordability and yields for landlords.


Long-term winners and losers

Although the effects of rising interest rates are unremarkable for now, they will pose challenges further down the line.

The changes to tax relief will mean that landlords who hold properties in their personal name, particularly if they are also borrowing at high loan-to-value (LTVs) and/or higher rate tax-payers, will see their tax position worsen.

A tax on a business with increasing revenue and higher interest costs that cannot be fully off-set, means that the tax due will be at a higher rate even if net profit remains the same.

This is a major issue for landlords when it comes to affordability and shows that the real long-term winner to emerge from the interest rate hike will be neither landlords nor savers, but the taxman.

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