Rising interest rates:
What investors need to know
As a property investor you will be more aware of rising interest rates than most, so it was probably little surprise when the Bank of England once again increased the base rate, this time to 1.25%. The big question is what does this mean for you? To answer this and other important questions, we shall take a delve into rising interest rates in the hope of providing some clarity.
The Bank of England base rate – what’s it all about?
Also referred to as the ‘base rate’, ‘bank rate’ and ‘interest rate’, the BOE base rate is the rate of interest that banks and lenders pay the Bank of England when they borrow money. It will therefore have a knock-on effect on how much these banks and lenders charge their customers for borrowing. As the base rate goes up, so too will the cost of borrowing for everyone else.
Increasing the base rate is a tool that is employed by the Bank of England in an attempt to control escalating inflation. An influx of money into the economy by the Government over the last couple of years has resulted in increased consumer spending, pushing inflation in the upwards direction. In short, an imbalance between supply and demand has driven the cost of goods and services higher and therefore devaluing the pound.
With inflation expected to reach double figures by October this year, a move to increase the base rate is designed to decrease consumer spending as people tighten their purses. This should therefore begin to stabilise the rate of inflation as demand for goods and services lowers. So what does this mean for property investments?
Rising interest rates and property investing
The big question for investors is: are mortgage rates going up? The answer is undoubtedly yes and with further increases to the base rate expected, mortgage rates are likely to rise throughout the remainder of the year. However, when compared to the historical average, mortgage lending remains relatively cheap.
As an investor should you be switching your mortgage product? If you have a fixed rate mortgage deal that is coming to an end this year it may well be worth looking at your options before the base rate increases further. However, there is much more to mortgage lending for investors than the interest rate alone. What is your business structure, what are your plans for the property and what type of property do you have? Leverage the expert knowledge of your mortgage broker to get the best advice as each situation will be unique.
Asset Academy-educated investors will be very familiar with stress testing their investments. This is the simple process of running your calculations at higher interest rates to see what happens, if for example, interest rates rise. The current market is the best opportunity to understand the importance of stress testing and how a little bit of expert knowledge can go a long way when doing your calculations.
The wider ramifications of interest rate rises
Of course nothing works in isolation. Investors, home owners and renters are all being affected by rising interest rates, rising inflation and rising living costs. Property prices too have been increasing at record levels, although the market is now showing signs of slowing. This has created a climate that is particularly tough for first time buyers as they attempt to gain a foot on the ladder.
With other buyers also being priced out of the market, the demand for rental properties is currently booming. As it was before the current economic situation, the supply of rentals was falling well behind target, so today there is an even greater shortage of suitable rental properties.
There is one other component that has been adding to the problem for renters however.
With changes to Government legislation, taxation and now interest rates, many pre-existing landlords are exiting the market and selling up. On the one hand this provides opportunities for professionally trained landlords who understand how to navigate these changes. On the other hand it could cause significant issues for those who are needing to rent a home. We have already seen rental price increases across the UK, partly driven by demand, but it is likely that a rise in mortgage payments for landlords will also be passed onto many tenants.
What should you do?
It is evident that mortgage lenders are competing fiercely in a market that is remaining buoyant. For buy to let investments this equates to strong mortgage deals being available, particularly on 5 year fixed rate products. Now is a good time to examine your current borrowing to see if you need to take action. Pick up the phone and speak to your mortgage broker because they will be the best person to advise you.
Remember that property investing is a long-term plan and you should anticipate such fluctuations and changes in the market. The bottom line is that there are not enough homes for people, and with an increase in people renting, landlords have an important role to play. Check your cashflows and pressure test your calculations to make sure your investments are solid enough to weather these changes.
The next year will be an interesting time for flipping properties, which you can read more about here: Flipping Houses For Beginners. Will rising interest rates have a significant effect on house sales? We will have to wait and see. However, if you are planning property flips it would be prudent to up your due diligence and pressure test every component of them.
Finally, one of the best things you can do is what we call at Asset Academy ‘staying close to the fire’. This means being active within our supportive community of investors and joining as many networking events, online events and courses as possible. Plus also keep a close eye on the Asset Academy Member’s Facebook Page. If you are not a member yet we have just the thing for you. Why not join a one hour Discovery Training Webinar by registering here. It’s free, live and online to provide a great way to get started in property.