With so much talk of inflation and the potential sting in the tail that is rate rises it's important that we work out what the real impact will be on our properties and portfolio.
Use this simple calculator to work out the impact on your portfolio.
At Gladfish we specialise in Set and Forget Portfolio Management of your properties. From the research through to the letting and management as well as the strategic decisions about the market. Our team has over 20 years experience.
For all Brett's Coronavirus resources **including the Excel in this Video** https://www.gladfish.com/recession/
Video Transcription:
Hey guys so how do we calculate the impact of an interest rate increase in our on our portfolio? So I thought I'd just take you through really quickly and I've just made up this simple spreadsheet and basically what you do is you fill it out with your own data I've got up to ten properties here you can download it free from the website. I'll post a link in below and make sure if you're interested in property investment if you're interested in the cycles and you're interested in the economics that applies and all that sort of stuff that relates to being a property investor and in particular a set and forget our hands-off investor we don't really want to have done at the time to get involved and do it all yourself, then make sure you subscribe and listen to my channel regular our videos coming out and yeah just pop down and press the subscribe button and yeah you'll get lots and lots of good content.
This is basically how do we calculate the impact of interest rate changes because even though you know right now we're in the potentially a middle of recession a lockdown and all that sort of stuff the reality is we are likely with all the amount of stimulus getting pumped in and the government borrowing we're likely to see interest rate increases. They're likely to come short down the track and I'm thinking maybe a year or two but it's always good to get prepared before and run this scenario. This is one of our scenarios run with our portfolio management clients and basically it allows you to sleep better at night. It will do two things it'll either allow you to stress and worry and realize you need to make a decision but at least you'll be aware of an impact or it'll allow you to sleep easy knowing that whatever the market throws at you you're okay from this perspective it's one of the two scenarios we run and I'll run another video which is what happens if we lose our job okay and we run that scenario so check the video out for that scenario.
It's really really simple so basically what I've done is I've got this simple Excel spreadsheet you can also chuck it into sheets it's really easy to download and basically all you need to do is fill out all the yellow bits. So effectively you put your property name oftentimes you have a name few properties I do you know where it's normally just you know it might be gatehouse or it might be you know a street name or whatever that you know that you know that's where you've got or a development name okay I put the address, suburb, county, postcode, date bought, the purchase price, current valuation, mortgage owing and mortgage lender. Now there's a few blanks in there, this is not my data this is just practice data because I just wanted to show you what the impact is.
As we come across that's that once you enter that data you've then got a little bit more to enter in so you've got loan value there which is just simply the loan divided by the value which gives your percentage okay actually something's gone on there's a hundred sixty-seven percent of land of a which is clearly anyway we'll leave it like that I'm not gonna play with these too much your interest rates okay and then what you've got is a drop down here for interest rate either repayment or interest only okay then you've got fixed all right.
Right now I've left this so it deals with interest-only only not repayment and obviously you've got fixed and variable depending on you know what will happen because that will determine and it depends on what the tie-in is so you need to make some adaptations this looks at a point in time it doesn't look over time so it's not calculating everything if you want to do that you can go to our normal cash flow worksheet if you speak to the team you can get a download copy of that and see what you know interest rate rising and lowering for each property and that stuff isn't get to in a bit more advanced. But if you're just looking for some comfort in what happens if interest rates go up 1% 2% 3% you know and that sort of thing then that sorts of thing this is a really easy thing to do ok so we've got that information basically in we've then got our gross rent okay and our agents fees so then we become and that's 10% and then that's calculated 10% up here is the VAT okay or GST or whatever you want to put in if you know you can change that so I was 10 percent in your country changes 10 percent whatever that is okay it just leads from they've left it all open so you can play with this and you know do with your heart's intent you can obviously redownload it if you need to.
So-net rent comes in at that which is basically that less that equals that then you've got your mortgage payment and your mortgage payment quite simply on an interesting basis is just literally the amount owing where are we the amount owing multiplied by the interest rate which gives you the annual interest divided by 12 okay simple simple simple the repayment one is a little bit more advanced than that okay.
So I'm not going to deal with repayment in this particular arm in this particular presentation because the Glitter have been more advanced because you're putting time and terms and all that stuff okay so this spreadsheet don't worry about the repayments just meant for a simple thing so basically you got all your costs and your service charges now you put you annual rate in it'll divide by 12 and put that there annual ground rent divided by 12 and put that there. Buildings insurance any other expenses you've got obviously there's more than that and then we'll all say is profit before mortgage and profit or loss after mortgage.
So you can see that already this one's making a loss all right now put that in there and you know think these are not real properties is just what I've planned or what I've put in place now once we've done that that's our source data now what we're gonna do is gonna come down here and we're gonna actually map out and we don't need to do anything here okay it's already done it all for us which is basically that we've got property 1 and the current mortgage is 292 and actually it's 292 all the way through no matter how interest rate goes because if we go up here it's fixed alright.
So let's have a look at property to which you'll see starts off at 292 the mortgage payment okay if interest rate goes up sorry 250th starts off with if interest rates go up by half a percent it becomes 292 by 1% 333 and then obviously 375 so eventually if it goes up by 3% okay so it started off if you have a look here at 3% so if it was going 6% then obviously at 6% it's gonna be 500 per month that's the mortgage payment alright.
Then what we're going to do is come down here because now that the new mortgage payment now we can do is we can actually look at this and see right this is our current profit okay before mortgage or this is account profit before mortgage then what we're gonna do is take away the mortgage payment okay the new mortgage payment from above that gives us in this case 151 profit 151 that stays the same because remember that was the fixed one okay but as you can see here at half a percent it was still 200 1 percent 160, 118 and we're getting less and less and obviously to go from green to red red means a loss you know okay but the white means getting close to a loss green means obviously good you know so but effectively you can see down here this one started off as 110 profit then it went to 26 and minus 57 now the good thing about this is what you can actually see is the across the portfolio so you're originally here that was your own profit there but now you've got here you know you're making a thousand profit so that was profit before mortgages. Here you're making a thousand after mortgages seven hundred three hundred so obviously, in this case, you could probably survive about 2.5% interest rate rise okay I always like to keep at least 2% you can see it's seven bucks there 7.7 pounds there so really this portfolio probably is okay now you start you're gonna start to stress, okay but what it means is you can start monitoring this. You go you know what actually it looks like this particular property which is gonna you know almost account for you know 40% of the losses I need to get rid of that property or I need to remortgage it put it on a little fixed I need to do something with it see you want to get in as early as possible because if you get in as early as possible then you are you save money.
Sorry I just realize that this is a sign your mortgage anyway um so yeah so this one you probably want to do something with and maybe this one and maybe this one because these are bigger figures now if you can find seven-hundred a month lost but remember it's not just seven hundred month loss it's actually a thousand profit to seven so the spread is 1700 difference less money that's coming in each month okay that makes a significant difference when a 3% increase so you may want to go and fix some more pros some more arm properties you may want to sell some off you may want to who knows what there are lots of options you know you can bring on a business party who sell it off on a lease you know the option you can look at you know turning it to a service apartment you can look at hundreds of different ways to make either more income or decrease the costs.
That's really what this is about it gives you when you do this you can sit there and go actually I probably got 2% before i go negative ok I can afford that now if you're relying upon say you're surviving on this you know that 1000 bucks and so that 1000 bucks was 4000 and also in that 4000 goes to 1000 but you're surviving that 4000 each month well then you need to go hold a sec I can't survive on 1000 I can get down to 2000 what am I going to do and the idea is you do it upfront you do it early you make decisions you know before you know franticness the panic and all that hits.
Let's face it the government's right now is spending so much money you know and what they're doing is borrowing from central banks that have to be paid back and obviously when it's paid back the people who are going to pay for that is you and I through our taxes and obviously through inflation and inflation means interest rate changes.
So you know because obviously as the inflation goes above that 2% target in most countries to say 4% you know I'm saying sort of 4% or 5 % it could potentially get to that means that obviously we need to be aware of that because they're not trying they're probably raise interest rates to accommodate the higher inflation to keep that down and that's not necessarily going to be a good thing but it's something we need to prepare for.
So anyway guys hopefully that gives you a bit of an insight into what you can do from here and the action you can take as I said get in early and get this worked out and when you do it you're actually a lot of times you'll feel much better about the numbers and it'll allow you to sleep at night and feel better okay and that's what this is about.
If you want to get into sort of heart or portfolio management and really looking at your portfolio looking at each these properties and how do we increase the profit and how do we decrease the costs you know on these sort of things that are best done with a portfolio manager and the best thing to do is sit down and well sit down do a zoom meeting at the moment with one other team and they can take you through and you know that's what these guys are trained for.
All right so if you're interested in property you know this is a place to be but if you've got a portfolio whether that be one property or whether it be ten properties it doesn't matter we can help you get control of it and make the strategic decisions that you need to change your strategy to meet the market because the market is changing constantly and you need to be on top of it no use being an emu sticking your head in the sand because you've got to kick up the ass I did say that didn't I anyway guys thanks very much and have a great day stay safe, stay healthy and stay at home see you later bye
