Interest rates have risen, what now?
So, we knew it was going to happen at some point and we are now being told that interest rates are very likely to rise again next year.
So, what does this mean?
Well some people think it will be good for savers but not so good for investors?
It is true that it will be better for savers as they will get more interest on bank savings and bonds/Isa’s, but does it necessarily mean it is bad for investors.
Well the answer is yes it will not be as good for investors if you are not prepared. But if you are prepared then there are still things you can still do to minimise the impact these changes will have on your business. Here are a few things you can look at right now.
- 1. Fixed rate mortgages
Firstly let’s keep some perspective on this. You can still fix your mortgage and take advantage of the low rates that are still available. You will need to speak to a qualified advisor about the best available rate for you, however we have recently fixed our BTL mortgages for 5 years for well under 4%, which is still very cost effective. HMO mortgages will likely be higher rates but you can speak to a qualified advisor about this.
- 2. Increase rents in line with the market.
Professional landlords are always looking at rents to keep up with the market, however as costs rise it will be imperative to increase these in line with the market forces. Some landlords keep the rents the same for many years as it is easy to do so, however as the market changes and rates rise they will really need to look at this so it doesn’t affect their bottom line to much. Even an extra £25 a month can make a big difference especially across multiple properties.
- 3. Look at out-going costs regularly.
Property is like any other business and should be treated as such. Therefore, it is always important to look at outgoing costs, but even more so when you get an increase in costs such as the interest rate rise. Therefore, it is important to look at your other costs such as what you are paying for insurances, maintenance, management, or service charges amongst other things. That way you can find out if you can tighten up these costs to make up for the increase in interest rates.
- 4. Make sure you are not paying too much for the property and it works at a higher interest rate.
Now this may sound obvious but it has happened a lot in my area over the last year especially with HMOs where people have paid well over the odds for the property. They have looked at the property working on a lower interest rate and done their figures based on this, which really is not the way to do it. We look to work out all our figures historically on the higher interest rate of 6-7%, and if the property still works at that rate then you know you have a good buffer even if you are getting a 4% interest rate currently. This is very important.
- 5. Keep a maintenance or buffer fund.
It is very important as an investor to keep a maintenance or buffer fund. This is because property or any business is really about serving and managing your debt (good debt though it is). Having a buffer fund will allow you to ride out any tough times when costs may spiral a bit. This can be a buffer of bank savings or even a line of credit, but something you can get access to quickly if needed. It will all help to service the debt over time, meaning you make monthly cash flow and should achieve good capital growth as well.
So, as you can see there are still things we can do even though interest rates have risen. As mentioned earlier it is important to also keep things in perspective and realise it has only gone up 0.25%. Although it is not good that it has gone up, we knew this was inevitable and it will apparently put an average of £12 on someone’s mortgage payment. This is not catastrophic but it is important to now realise that they will increase more, so you can aim to fix your rate now if possible, and follow the steps above.
So, what are my thoughts overall and what are my plans moving forward?
Well due to me feeling this was inevitable at some point, I decided to fix a lot of mortgages over the last year or so, but still have a couple which I haven’t as they are not coming to end until early next year. This is slightly frustrating however having such low interest rates for years has more than made up for this. It is also important to mention that as an experienced landlord with many properties, there are sometimes only certain lenders I can use. Therefore, for anyone new out there, sometimes having less properties can be a good thing as lenders look at this more favourably. For example, currently you can only have a maximum of 3 properties with some of the banks, meaning after this you will have to go somewhere else. We can only work in the market we are in, but need to make precautions for the long term, and so as long as you do your due diligence and make sure the properties work on higher interest rates, you should be leaving a buffer in there should you need it in the future.
These key fundamentals are what I followed even though rates were low, so I was prepared for this increase. You can still look at these now to help, before rates increase any further.
Questions and comments always welcome.