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Inflation has hit the UK harder than most, with our Consumer Price Index (CPI) far exceeding that of other G7 economies. As such, it came as no surprise when, on the 11th of May 2023, the Bank of England (BoE) once again raised its interest rates in an effort to drive down inflation – seeing the bank rate soar from 4.25% to 4.5% as a result.
While the twelfth interest increase might be good for the long-term economy, the news is not so great for the UK general public. With the aim of reaching just 2% inflation by the end of next year[1], we should expect to see the impact of the continued BoE increments reflected across all other rates, including savings, loans, and mortgages, as well.
The future may be uncertain but there’s one thing we know for sure: the cost of borrowing will be higher and the days of 1% interest rates are firmly over.
What does this mean for landlords?
When the Bank of England raises its rates, it doesn’t take long for other banks to follow suit and you may find yourself paying out more interest on the money you borrow than the interest you receive on your savings. If you’re on a buy-to-let mortgage, you may therefore be wondering if it’s time to hand in your notice as a landlord before being evicted from a seemingly sinking market.
Fortunately, it’s not that simple. If you’re on a fixed-rate mortgage, your payments won’t be affected until the set period matures and – although getting a new fixed deal may prove more costly in light of the 2022 mini budget – most banks will have already factored the latest interest increase into their pricing.
Having said that, most buy-to-let landlords are on a variable rate or tracker mortgage, which means that when inflation goes up, so do their repayments. This is less than ideal when tenants are already struggling with the cost of living, making it a bad time to put prices up. Add this to the higher maintenance costs you will have to pay for property upkeep and it’s understandable to feel that you’re running on borrowed time.
Just remember that, as long as you’re able to hold onto your tenants – something that reasonable payment plans can really help with – you should still be turning a profit and the difference in interest on incoming payments and outgoings will be negligible. It’s more a case of waiting out a minor, short-term convenience than weathering a storm.
In fact, what many landlords fail to consider is that most tenants need them more than they need their tenants. With both living costs and borrowing rates at an all-time high, it’s harder than ever for people of all age groups and demographics to save up for a deposit and get a foot onto the property ladder. This means the rental properties in your portfolio are now in greater demand than before.
What to expect in the future: an opportunity for investors
Interest rates are reviewed on a regular basis, meaning they could shoot up further if inflation fails to slow. The BoE will issue its next decision on the 22nd of June this year with experts already forecasting an additional rate rise to 4.75%.
Rather than seeing this as a threat, however, we encourage investors to seize the opportunity. With property prices also running high, now is a great time to reassess your property portfolio and rental strategy. Sell any assets that aren’t bringing in much capital, using the proceeds to take advantage of other bargains.
In contrast, you could consider becoming a ‘lender not a landlord’ and using the proceeds to invest in alternative property bonds, which enable individuals to benefit from investing in a property-backed asset, while generating higher-than-average returns – all without the hassle of managing tenants.
Ultimately, it’s simply a matter of patience. If you’re willing to play the property-market waiting game, you will need to tolerate slightly higher interest on your mortgage and take time with your development strategy for the next couple of years.
Alternatively, if you want to find out more about investing in property bonds and the level of return you can expect, please contact a member of our team today.
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