Don’t be caught out by increasing mortgage rates
In a recent investment blog, I discussed the squeeze on property investment and how buy-to-let mortgage rates have already started to rise. If you’ve bought your investment property in the last year or two, you’ve benefited from some of the lowest buy-to-let mortgage rates in the history of property investment. The low-interest rate environment has offered some incredible property investment opportunities.
What concerns me is that you might get caught out by higher interest rates. A great property investment can quickly turn sour if you’re not properly prepared for higher interest rates.
Here I’ll discuss seven strategies you can use to prepare for higher interest rates and ensure that your investment property remains profitable throughout the next interest rate cycle.
1. Pay down your personal debt
It might sound strange that I start with a recommendation for your personal finances. After all, I’m the first to say that you should treat property investment as a business. But here’s the thing: while investing in property is a business to which you shouldn’t get emotionally attached, your financial welfare is intrinsically linked to its performance.
If your investment property cash flow moves into negative territory, you may need to subsidise it with personal money. You can only do this if your financial position is strong. So, my first piece of advice is to pay down your personal debt:
- Start with the most expensive debt you have.
- Nix your store card and credit card balance.
- Follow that with hire purchase and personal loans.
- If you have any ‘buy now pay later’ purchases under your belt, make sure that you have the funds to clear them and do so before they start accruing interest.
If you don’t have the cash to eliminate your debt, consider ways that you could restructure it and reduce your monthly expenditure. It could enable you to pay off your debt more quickly. One possibility may be to take equity from your home and extend your mortgage to pay off more expensive debt.
Take this opportunity to review your spending, too. Read our investment guide “How to save an investment property deposit quickly” for tips on how to save as much as £7,900 every year.
2. Ensure your rent payments are up to date
Now your finances are in order, it’s time to work on your property investment finances and cash flow. The first thing to do is to make sure that your tenants are up to date with their rental payments. If they’re behind in rent, give them a gentle reminder.
If you’ve got a good tenant, very often the reason they may be late in paying is simply that they’ve forgotten the rent is due, or they’ve been so busy in their day-to-day life that it has slipped their memory. There’s one easy way to make sure this doesn’t happen, and that is to encourage the tenant to pay their rent by direct debit.
3. Make sure you build a contingency fund
One of the principles of good property investment is to build up a contingency fund. By putting some of your positive cash flow in a separate account every month, you’ll soon build up a fund that can be used to subsidise an increased mortgage rate (or void period, or pay for unexpected repairs).
As we head towards higher interest rates, increase the amount that you’re putting in the contingency fund. It will help you get used to a lower ‘net’ income as well as increase the rate of build-up of your fund.
You can then drip feed this fund into your mortgage payments until you can increase the rent on your investment property.
4. Raise the rent
If you’ve an exceptional tenant, you may not want to raise the rent, but you should consider it anyway. If you’ve signed a rock-solid tenancy agreement, you will have included a clause about when and how you can raise the rent. It may be that you will have to wait a few months. Meanwhile, your contingency fund does its job.
(This article from Ezytrac Property Management has some great tips on how to raise rents and retain your best tenants.)
When it comes to raising the rent, if you’ve been a good landlord and kept your tenants happy in their home, most tenants will accept the increase as part and parcel of the renting lifestyle.
5. Review your mortgage
Meet with a buy-to-let mortgage broker and review your mortgage arrangements. There may be a better offer in the market. You may be able to reduce payments and extend the term. Finally, you may wish to take advantage of a fixed rate offer – be quick, though, because when interest rates start rising, fixed rate deals get fully booked or withdrawn quickly.
6. Review your property management arrangements
After your mortgage, one of the major expenses will be property management. Now’s the time to review your arrangements. If you can put your hand on your heart and say that your current property manager provides real value for money, then that’s great. But if you find that their communication is haphazard, maintenance issues aren’t resolved promptly, and they very rarely provide ideas about how to make your property investment work harder, then it could be time to search for a better option.
You’ll also find that some estate agents run a property management business almost as a sideline. These are often expensive services, as well as being substandard. It’s best to steer clear of these and always compare property management charges.
7. Keep your eye on the prize
Finally, keep your eye on the prize. Regularly review your current financial position, both personal and in property, and update your financial objectives. Your goals and lifestyle are what matters. If you monitor your property investment portfolio regularly, there is no reason why it should not continue to perform as expected.
Early action to evolve and develop your investment strategy, and keen research to ensure that you buy in the best places to invest in property UK, will help keep your investments on track. Undertake a review of your portfolio’s cash flow at least once a year by completing a two-year cash flow worksheet, and you’ll always be prepared to weather any storm.
Finally, remember that it is possible to invest in property and profit in any market condition and throughout the property and economic trend cycle. Contact one of our team on +44 (0)207 923 6100, book a meeting to discuss your financial objectives, and we’ll show you how.
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