So it finally happened; at the start of the month, the Bank of England (BoE) raised interest rates to 0.75%.
This 0.25% increase is the first in over a decade, and puts interest rates at their highest level since March 2009. Bank of England Governor Mark Carney advised that there would be further rises to come – but that they would be “gradual” and “limited”.
Over 3.5 million people with variable or tracker mortgages will be affected as their mortgage payments will increase. To put that into perspective, on a £150,000 variable mortgage, a rise to 0.75% is likely to increase the annual cost by £224.
It is impossible to predict what will happen in the future; some commentators are suggesting that the increase is to give the Bank some wiggle-room in case a no-deal Brexit causes another economic downturn (so rates can be dropped again). Others are saying it is to slow inflation. Either way, homeowners and landlords are caught in the middle, trying to decide if now is the best time to buy, or whether they should wait and second-guess the markets and see if they drop again, along with house prices.
Popularity in 5 Year Fixed BTL Mortgages
Many buy to let investors switched their mortgages to make savings on their mortgage payments ahead of the recent interest rate rise, with a massive 93% choosing a fixed rate mortgage. According to Mortgages for Business, of those 93%, 69% chose a 5-year fixed rate.
Their research also found that in Q2 of this year, 20% of all the mortgages available didn’t have a fee attached, which suggests lenders are absorbing costs in order to remain competitive.
Landlords Need to Capitalise on Cheap Lending
Landlords and property investors who are heavily geared (with mortgages that are high compared to the value of their property) are being encouraged to re-mortgage sooner rather than later.
Research from DJ Alexander Ltd has discovered that one in three landlords are already paying too much for their mortgage.
With changes in the way tax is calculated on rental income, it is more important than ever for landlords to review their property portfolios and capitalise on the cheap lending if they are looking to increase yields.
Number Crunching – Treat it Like a Business
Hannah McCartan, MD, McCartan Lettings comments “There is no simple, one-size-fits-all answer to interest rate rises as the implications for each individual are so complex.
But one thing is certain; if they haven’t already done so, Landlords must start crunching numbers now for their 2018/19 tax bill and longer term cash flow forecasts. It may seem like a boring exercise (one that may be a bit too complicated to sort out on your own!), and it’s a long time before that bill has to be paid, but reviewing your mortgage and getting a better rate now could increase cashflow and help the numbers going forward.
If we take the example above, if there is an extra £224 interest to pay on a buy to let mortgage in this current tax year, only 50% (£112) can be directly off-set against rental profit. The remaining 50% (£112) will only attract tax relief at 20%, even if you are a higher rate (40%) or additional rate (45%) tax payer. This is still the case if your rental income hasn’t gone up.
Whether you have a large property portfolio or just one rental property, it should be treated like a business. If you have lending on the property, you need to have a strategy in place to make that lending work for you that you review regularly.
Knowing and understanding what all your options are is key to making the right decision about your property investments, and a well-managed portfolio will always remain a profitable business.
Getting specialist advice from independent letting agents, mortgage brokers and accountants is vital in this process.”
If you are looking to invest in Buy To Let in Swansea, or would like to be put in contact with specialist tax and mortgage advisers, please click here to email us.