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The Bank of England’s Base Rate and Its Impact on Property Investment

Sara NewsonBy Sara Newson on 01 November 2023

The Bank of England’s decision to maintain the base rate at 5.25% has sparked discussions and curiosity among property investors. In this blog post, we’ll delve into what this decision means for the property investment market and why immediate, dramatic shifts may not be on the horizon.

The Base Rate At a Steady Anchor

The decision to keep the base rate steady, at first glance, might appear to have little influence on the property investment landscape. However, as seasoned investors know, the devil is often in the details.

Lender’s Stress Test

Property investment, particularly in the buy-to-let sector, is guided by various financial calculations and criteria. One being the lender’s stress test rate, a crucial component when you’re considering a new investment property.

What is the Stress Test Rate?

When you intend to purchase an investment property, you typically need to demonstrate that your rental income can comfortably cover the mortgage interest payments. This requirement is vital, whether you’re buying the property in a personal name or within a limited company, a common practice in today’s property investment landscape.

The Unseen Challenge

Here’s the catch. Lenders don’t typically use the actual interest rate they’re offering you. Instead, they use a considerably higher rate, which currently hovers around 7.5%. This elevated rate, known as the stress test rate, is used to calculate the feasibility of your investment. It ensures that your projected rental income (whether paid monthly or annually) is a pre-set percentage of your interest payment.  The percentage depends on whether buying in a limited company or personal name – currently the rates are 125% & 145%.

The Quandary for Property Investors

The Bank of England decision to keep the base rate at 5.25% doesn’t translate to a reduction in this stress test rate. In essence, it means that investors will still be evaluated against this higher rate. While this isn’t an issue for conventional buy-to-let properties, it poses a challenge for properties used for serviced accommodation (SA).

SA in Focus

For properties in areas such as York, where SA is a prominent strategy, the stress test rate can become a hurdle. Lenders typically assess these properties based on their assured shorthold tenancy (AST) value, which may not reflect the higher income potential of an SA business.

Essentially, while SA properties can generate significantly higher income, lenders may only consider the lower AST value, making it challenging to achieve a 75% loan-to-value ratio.

Implications for Property Investors

The net result is that investors may need to inject more capital into their deals, making it essential to have a deeper pocket. The economic landscape for investments, especially in regions like York, could lead to properties not “stacking” as profitably as before, affecting potential ROIs.

So, while the Bank of England’s base rate decision might appear good on the surface the fact the stress test rate remains unchanged will provide little immediate and short term change on the property investment landscape. If you have questions or would like further insights, don’t hesitate to reach out. We’re here to help you navigate the ever-evolving world of property investment!