Interest rates are rising: here’s how buy-to-let investors can profit from this
The years of low mortgage rates that have benefited investors in UK residential investment property look like they’re coming to an end. Combined with tougher lending rules, and changes to mortgage tax relief that are being phased in over the next three years, you might be feeling pretty squeezed right now.
In this article, I’m going to explain why I’m convinced that wise investors will need to take action to batten down the hatches, so to speak, and protect themselves against what’s looking like a turning point in the interest rate environment.
I’ll look at the Bank of England’s latest rules for buy-to-let lenders, and why property investors who have taken advantage of the best property investment education are already prepared for a tougher buy-to-let mortgage environment.
Finally, I’ll discuss why higher interest rates don’t have to be bad news for UK property investment.
Mortgage rates are moving higher
After the EU Referendum, the Bank of England (BoE) was quick to cut interest rates. When it did so, it said its decision was to avert any economic crisis caused by the vote to leave. Since the cut, economic data has shown that:
- Unemployment is down to multi-year lows
- Employed numbers are at record levels
- Economic growth has outperformed expectations
- Business and consumer confidence are rising
- House prices have bounced after a mild slip
The UK economy certainly doesn’t feel like it’s under pressure. The global economy is also moving in a positive direction, with European, Chinese and American growth all higher than previously expected.
When America moves, we usually follow
While the BoE made its decision to cut on domestic grounds, it can’t completely disconnect from what’s happening in global markets. Since Donald Trump’s election as President-elect, US 10-year Treasury bond yields have risen. It is the most watched government bond rate in the world and has proven to be a good indicator of impending interest rate moves.
The rise in the 10-year Treasury yield has forced American mortgage rates higher. They’ve already increased by more than 0.6% – from an average of 3.5% to 4.125%. Why is this significant for the UK market? The move on the US 10-year Treasury is likely to push the yield on the 10-year gilt (the UK equivalent) higher. That will increase borrowing costs here, and mortgage rates are likely to follow.
How much might an interest rate rise cost you?
If the interest rate on buy-to-let mortgages mirrors the rise on US mortgages that we’ve seen in the last couple of weeks, a typical £150,000 loan will cost £900 a year more in interest.
If you’re looking for proof that buy-to-let mortgage rates will soon be rising, then look no further than Skipton and West Bromwich – not the places, but the building societies. Skipton recently raised some of its mortgage rates by 0.37%, while West Bromwich has scrapped its 10-year fix (which was the lowest on the market at 2.59%).
What mortgage brokers are saying
I’ve also taken note of what mortgage brokers are telling me, and they’re kind of convinced it’s not if, but when interest rates will rise. They say that the five and ten-year fixed rates will be the first to move (remember that West Bromwich just cancelled their ten-year fix), with a rise of 0.25% to 0.5% on the cards in the coming weeks and months.
The message is clear: mortgage rates look likely to rise. When interest rates start rising, they could move pretty quick. They’re so low at the moment that the effect of any increase will be magnified. If you haven’t prepared for this yet, then you need to act fast.
What can you do to defend your cash flow against an interest rate rise?
Gladfish investment education includes all the principles of property investment. One of these is to be prudent when it comes to cash flow.
In the last few months, the BoE has told buy-to-let mortgage lenders that they must assess mortgage applications using an interest rate ‘stress test’ (more about that in a few minutes). It is something that is central to good property investment – the cash flow worksheet that we advise property investors to complete and review regularly includes allowing for a rise in interest rates. That’s sensible investing.
Other things that you can do to help protect yourself against rising buy-to-let mortgage interest rates include:
- Building up a contingency fund from rental income profits. This will provide the cash to ‘subsidise’ higher mortgage payments until you can regularise your finances.
- Speaking to a mortgage broker. Do this as soon as possible. They will be able to guide you to the best mortgage product and best lender in your circumstances. In a fast-moving market where lenders are continually changing rates, products and acceptance rules, an experienced mortgage broker could save you thousands in unnecessary interest over the lifetime of your buy-to-let mortgage.
- Raising the rent. This isn’t as difficult as most buy-to-let investors think. Ezytrac’s guide to maximising rental income profit includes tips on how to raise rents and retain your best tenants – it’s well worth a read. (Read our investment blog on the same subject, too: “Now’s the time to raise the rent”.)
Interest rates aren’t the only assault on property investment in the UK
As well as rising interest rates (and the changes to UK property tax), you are also going to have to contend with stricter buy-to-let mortgage rules forced on lenders. The BoE (via the Prudential Regulation Authority) has set a deadline of January 1st for all lenders to ‘stress test’ new mortgage applications (another reason you should speak to a mortgage broker now):
- Lenders must stress test mortgages using an interest rate of 5.5%
- Lenders have been increasing the amount of rental cover they require
- They will be able to factor in rent rises of 2% per year (but probably will be unlikely to do so)
Not only this but if you have four or more properties in your investment portfolio, you’ll have to provide more information about income and debts.
It’s not all bad news
Before you hold your head in your hands and get all doom-and-gloom, remember there is always a silver lining. For a start, as we discussed in our last blog post, UK property investors will benefit from years to come. The shortfall in housing supply against the demand for homes in the UK should provide a multi-year boost to property values and rental prices.
While higher interest rates may be seen as bad news, they might increase demand in the rental market. Higher rates make buying a home more expensive. Currents tenants who were hoping to buy may delay plans. Others may decide to rent instead of buy, as affordability issues take their toll. Occupancy rates could rise, and the extra competition from tenants should allow you to increase your rent.
The most important thing to do is to act now
With the spectre of rising mortgage rates raising its ugly head, there is not a time to waste in making a decision what to do. There are some strategies you can employ to mitigate higher mortgage costs, but when the BoE raises its base rate, or buy-to-let lenders start increasing rates in more aggressively, your options will become more limited.
Book a meeting with Gladfish (online or by phone) today on +44 (0)207 923 6100, and we’ll help you to assess your property investment portfolio and devise strategies to keep it in the black. We’d be happy to introduce you to one of our select panel of mortgage brokers, too. Whatever you do, do it now. Tomorrow may be a very different world.