Never get caught out by rising interest costs
In my last property investment guide, I answered the question How will a mortgage rate increase affect a buy-to-let property investment? Knowing that rises (and falls) in mortgage interest rates are all part of an economic cycle, you’ll want to protect your rental income and cash flow against possible rises. You might be particularly worried because interest rates are so low. After all, it wasn’t so long ago that base rates were above 10%, as evidenced in this chart here:
In this post, you’ll discover six strategies that the most successful buy-to-let investors use to protect themselves against a rise in their mortgage rates.
1. Investment research and due diligence
Your combat against the damaging effects of rising interest rates starts before spending a penny: property investment research is your guarantee to success as a property investor. We research 108 data points to ensure that each investment opportunity benefits from fundamentals such as:
- Local recreation amenities and retail facilities
- The local economy, job creation and work opportunities
- Infrastructures such as transport, schools, and municipal projects
- Urban regeneration and not urban sprawl
Making sure that you invest in the best property, on the best development, and in the best location is your first step to being prepared for a possible rise in the interest rate. Do plenty of research and read plenty of property investment guides and the likelihood is that your property will be attractive to tenants in all market conditions and command the best rent.
2. Be conservative in your cash flow projections
Too many times we’ve seen clients who are considering a property investment overestimate rental income and underestimate costs. If you do this, it will only take a couple of weeks of a void period or a small rise in interest rates to ruin your estimates.
We recommend erring on the side of caution, factoring in all possible costs and allowing for a rise in interest rates. We’ll provide you with a two-year cash flow worksheet that lets you see exactly how an interest rate rise will affect your income.
3. Build in a contingency
You know how your parents always told you to save for a rainy day? Use the same principle when you invest in property. Put away a slug of any positive cash flow as a contingency fund. That way you’ll have the money available to fund any short-term shortfall between costs and gross rental income.
4. Raise the rent
Generally speaking, the Bank of England lifts interest rates to fight inflation. Because prices are rising, your tenant may already be expecting you to increase their rental amount.
In other words, pass as much of the increased mortgage payment on to your tenant as possible.
5. Include a rent review clause in your tenancy agreement
There’s a great article, I recently read on an investment blog by Nick Rossington at Ezytrac Property Management. The article discusses six strategies to avoid the nightmare of buy-to-let rental disputes. In that article he suggests that you should include a rental review clause in the tenancy agreement. He says:
"One of the property investment guides 'ten essential tenancy agreement terms and conditions' is to include details about rental reviews. Do this and your tenant will be pre-warned: an increase won’t come as a nasty surprise and shall be more easily accepted.”
Wise words, indeed.
6. Fix your mortgage interest rate
Finally, if you’re more concerned about rates rising, then consider taking advantage of a fixed rate buy-to-let mortgage for your investment property. The amount of interest you pay can be fixed so it doesn’t rise (usually for up to a maximum of three years). However, when you fix your buy-to-let mortgage rate, you won’t gain any advantage if mortgage rates fall.
(Take advantage of the investor benefits of using a buy-to-let mortgage broker to find you the best mortgage and best rate for your property investment.)
If you’d like to discuss these strategies (and others) to protect yourself against a rise in mortgage rates, feel free to contact Gladfish today on +44 (0)207 923 6100. We’ll be pleased to work through your cash flow projections with you and make sure you’re prepared for an unexpected increase in your mortgage rate.
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