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Property Investors Fear Interest Rate Rises

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  • Property Investors Fear Interest Rate Rises

    It has been reported in leading news papers such as the Guardian and the Financial Times that interest rates have not been increased in the last 3 years. How will a rise in interest rates affect the property investor’s cash flow? What measures can be implemented by investors in preparation for the inevitable increase in interest rates?

    Interest rates have been at a record low of 0.5% since March 2009 thus making the last 3 years a bumper ride for the buy-to-let investor due to lower house prices, rising rents, and a host of mortgage deals to choose from.

    The editor of This is Money has forecasted that the markets have pointed to January 2015 for the next rise in interest rate. He added that when markets move a decent amount and the move holds, it can affect the pricing of some mortgages and savings accounts which as a result puts pressure on lenders to withdraw their best fixed mortgages.

    It can be argued that interest rates have remained low because the government has been more focussed on warding off a double dip recession. But how can this be sustained? Interest rates will have to rise to curb inflation and also to prevent the development of hyper inflation.

    With the information on reviews and predictions of interest rates, how will this benefit the active property investor?

    Property investors must be vigilant and review the interest rates on their portfolio annually.

    If you have a large portfolio, it might be best to change all the rates at the same time and keep a close eye on your cash flow.

    As the saying goes, ‘to be forewarned is to be forearmed’.

    Now that we are aware of the inevitable interest rate rise, put aside extra cash for sudden or unexpected rate rises and consider having a discussion with your lender regarding fixing your mortgage payments for up to 5 years as this will enable the investor to look closely at their cash position with certainty. You would have to take into consideration, the immediate loss of cashflow because fixed rates are generally higher than variable rates.

    We have looked at how to get lending if all is well but what would happen if you have been declared bankrupt, fallen into arrears, or have incurred a County Court Judgement( CCJ)? Bad credit mortgages were widely available to UK borrowers prior to the credit crunch and special mortgages were offered to anyone who had been declared bankrupt.

    Investors must be prudent and beware of false dawns as there is no certainty as to when rates will increase and by how much. Governments and heads of state are more focused on the Eurozone crisis. The Bank of England aims to keep inflation below 2% and above 1% looking 2 years ahead so be vigilant.

    If inflation is likely to rise, it raises the chances of an interest rate rise, which will then result in a decrease of your cash flow. This pressure or strain will give the investor the opportunity to examine his portfolio and ensure that the maximum rent is charged and also whether all the space in the property is used to its maximum capacity. One way to increase to the cashflow of a property (if the conditions permit you to) is to consider turning it into a HMO (house in multiple occupancy).

    The UK has once again entered into recession as of the 29th of April 2012. This may result in many people being put out of work while those who are still in work will face uncertainty. Investors could consider taking out an insurance policy to mitigate against tenant void periods in their properties. This may cost as little as £50 per month and can be very useful.

    In conclusion, interest rate rises may be announced after the dust settles in the Euro Zone. Germany and France are currently reviewing their financial situation while traders are panicking about the situation in Greece. These circumstances are all affecting the UK economy and we have very little control over how things will turn out. All you can do is, be proactive, be vigilant, and plan for the worst so that you aren’t left without a chair when the music stops.

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