Rate rises don't kill landlords, bad strategies do
All the indicators are that the Bank of England will raise interest rates again at the end of this week by 0.25%, taking the base rate to 4.5%.
And that might not be the end of it.
With inflation remaining stubbornly high, some commentators are saying that there could be at least one more rate rise to come before we start to see any sort of relief.
If you are a buy-to-let landlord in the UK, these rising interest rates are likely to be having a significant impact on your business, and could be causing you sleepless nights. With inflation pushing hard on maintenance costs and the cost-of-living crisis squeezing more tenants into rent arrears, you could be forgiven for thinking that this property investment lark wasn't such a great idea after-all!
However, all is not lost. With the right planning and strategies, there are steps you can take to manage rising costs and continue to operate a successful buy-to-let portfolio.
Quantifying the impact of rate rises
Firstly, it is important to understand how interest rate rises impact your buy-to-let mortgage repayments.
Most buy-to-let investors with mortgages have two or five-year fixed-rate agreements, which means, for many, the rate increase won't have any immediate effect.
However, those due to refinance soon are likely to see fewer deals and at much higher rates than they have previously enjoyed.
For example, if you had an interest-only mortgage of £225,000 at a rate of 2.5 per cent on a buy-to-let property worth £300,000, you would likely have been paying in the region of £469 a month.
If you remortgaged at a rate of 5 per cent, the monthly payments would double to £938.
This will directly impact your cash flow and profitability.
Increasing revenue
There are no two ways about it, if you can't absorb the rise, you must either bring more money in or cut costs.
Bringing more money in means reviewing your property portfolio to make sure that you are maximising your returns.
This might involve increasing your rents, which is not always an easy conversation to have with good, long-standing tenants. The reality is, though, costs are going up everywhere and an inflation linked increase is reasonable, and probably expected.
If it gives you any comfort, rents in every region in the UK have risen monthly and annually over the past 12 months.
According to the HomeLet Rental index for April, the average rent in the UK has risen 1.3% since March to £1,199 PCM. Excluding London, the average UK rent price is 9.3% higher than 12 months ago, at £1,006 PCM.
Managing costs
Another important strategy for managing rising interest rates is to review your current mortgage arrangements. This could involve switching to a fixed-rate mortgage, which will provide you with more certainty around your repayments. Fixed-rate mortgages are typically more expensive than variable rate mortgages, but they offer protection against rising interest rates and can provide greater stability for your property business.
Conditions have improved since the turbulence of last autumn, when average mortgage rates for fixed-rate deals exceeded six percent.
The best deals for limited company landlords on the £225,000 mortgage used in our example earlier are around 4.85% for a two-year fix.
Shaking up the portfolio
Increasing revenue or reducing your costs might also mean selling underperforming properties or buying new ones. By regularly reviewing your portfolio and making strategic decisions, you can ensure that your business remains profitable, even in the face of rising interest rates.
If you have a low yielding property that has had significant capital growth, now could be a good time to sell it. Higher interest rates and the ongoing cost-of-living crisis is slowing the housing market, and you might not get as much for it as you were expecting, but you are still likely to make a profit if you've owned the property for a while.
A bolder strategy for managing rising interest rates is to be proactive in seeking out new investment opportunities. This may involve diversifying your portfolio by investing in different types of property, or exploiting other landlords' need to sell in a hurry. By staying ahead of the curve and taking advantage of emerging trends, you can position your business for long-term success, even as interest rates rise.
Choosing your allies
Finally, it is important to work with a team of experienced professionals who can provide you with the support and guidance you need to navigate the challenges of rising interest rates. This includes working with an experienced finance broker to develop a long-term financial plan to help you manage your portfolio more efficiently.
As an example of this is action, we reviewed a client's portfolio at the end of last year and calculated they would be better off paying early settlement penalties and locking-in lower interest rates via a remortgage, than sitting on the deal that they had. Interest rates were on the rise and our client is already in pocket.
In summary
Managing rising interest rates is an inescapable part of running a successful buy-to-let business in the UK today. As a landlord, it is part of your job to manage your costs and ensure that your business remains profitable in the face of ever changing economic conditions. To achieve this, we recommend:
Planning ahead and developing a long-term strategy - one that takes more potential rate rises into account
Reviewing your mortgage arrangements - and considering switching to a fixed-rate mortgage to provide greater stability for your business
Regularly reviewing your property portfolio - making strategic investment and divestment decisions to diversify your portfolio and maximise your returns
Reviewing your rents - it won't be popular, but it can be achieved if sensitively handled
Working with a team of experienced professionals - ones who can provide you with the support and guidance you need to navigate the challenges of rising interest rates.
By following these strategies, you can position your buy-to-let business for long-term success and weather any economic challenges that may arise.