Yesterday the Bank of England kept interest rates to the record low 0.5% level again, however very clear signals are being given that rates will rise either later this year or early in 2016 - what impact will that have on Sunderland Landlords?
The media is full of typically hysterical tales of Buy-To-Let Armageddon - click below for a sample of articles from the Financial Times and City AM in recent days
Both of the above estimate over 5,000 Buy-to-Let repossessions per year as a result of interest rate increases
But is this likely?
An increase of 2.5% would mean someone with a £75,000 mortgage would have to fork out an additional £156 per month, so for those who have rental properties where the rent is just about covering the existing mortgage payments it could create a significant and unsustainable shortfall unless rents increased significantly to compensate
I'm not really sure that a typical Sunderland tenant would accept an £160pcm increase in rent, even if it was gradually increased over the years...given the majority of Sunderland properties are rented for around £500pcm this would represent a 32% increase
The increase in interest rates is not going to happen overnight, with most observers suggesting rates will increase to 1% by the end of 2016, 1.5% by the end of 2017 and 2.5% by 2025
This does mean that there is plenty of time to plan a strategy to minimise the negative impact of such increases
So what can you do now to protect yourself from interest rate rises when they do arrive?
The following is taken from some typically insightful analysis from the excellent Mark Homer of Progressive Property, which I thought was worth sharing
Mark suggests there are 4 strategies that professional property investors can implement to survive and thrive in times of rate hikes
1. Fixed Rate Mortgages
2. Tracker Mortgage
Fixed Rate Mortgages
Depending on the market, you can get 5 and 10 year fixed rate mortgages, which cannot go above a set level in the term of the fixed part of the loan
This is a safe way of protecting against rate rises, and very secure. You know from day one what you’ll be paying. You can work out more precise, less ‘variable’ cashflow figures. Downside protected, and you can sleep easy
But…you will overpay for a fixed rate vs. a variable (tracker) rate mortgage
You’re paying extra for the security
The banks want to hedge against future rate rises by charging you more; an insurance policy of sorts. You are also tied in for a longer period so your exit is restricted. But if rates don’t rise, you could have paid significantly more over the term, which could have gone in your pocket
A borrower with a 30% deposit would be paying a 2.3% premium if they took out a five-year fix over a tracker
But is it worth the risk?
Tracker or Fixed? Increased Risk or Overpayment?
The smart money is in diversifying your mortgage products so you have spread risk across tracker and fixed rate mortgages
Your hands may be tied by what mortgage products are available, but across a full cycle it is savvy to have a balanced mortgage portfolio of tracker and fixed products and to ‘Self-Insure’
Compare the current tracker and fixed rate mortgage products, take the tracker and pay the difference in cost each month into a savings account
You are in effect stock-piling cash as your own insurance policy for rate rises, by paying the fixed rate but covering the potential future rise yourself
You win either way, because if rates rise you’re as covered as you would have been with a fixed rate (barring serious disasters), and you get to save, earn on or lend out the cash if the long term tracker ends up less expensive
Use all 3 strategies in a diversified strategy, across different markets, mitigating any major market change
You can leverage your self insurance money for a compounded 5-8% a year return in a liquid investment, and each subsequent tracker mortgage becomes less risky in isolation
Now I'm no Independent Financial Adviser but the above advice from Mark Homer seems to make sense
It's inevitable that interest rates will rise so it will be far better to protect yourself in one or more of the above ways as having done so, if Buy-to-Let Armageddon does occur as has been predicted, it will undoubtedly present opportunities for those in a secure position with available funds - that will allow them to benefit from the discounted properties coming onto the market through repossessions
Call me on 0191 567 8577 or email email@example.com to discuss any aspect of property investment in Sunderland