Buy-to-let (BTL) is a great form of investment which can yield some good returns and is relatively low risk compared to other forms of investment. Nonetheless there is still risk involved and it is important that that is considered.
Running a lettings business is a long term project, not least because the typical mortgage is lent for 25 years. This means that you need to give some consideration towards movements in interest rates over that time.
Interest rates may have been at an all-time low for the past five years, but that will not last forever. Recently there has been a lot of talk about when the rates will rise: the consensus is that there will be rises when the economy is stronger, but the question remains as to how strong? But whether this year or later on, in reality interest rates will only go in one direction – up.
When interest rates do eventually rise, any landlord with a mortgage will have to make sure that they are able to cope with the rise. 72% of landlords have interest-only BTL mortgages. Our findings suggest that a third (32 per cent) of landlords worry about their ability to meet mortgage repayments if interest rates were to increase.
A helpful guide
As part of the NLA’s Rent Risk Resolve campaign the NLA has created a guide to help you mitigate the risks associated with interest rate rises by creating a contingency plan so that you know what to expect and are prepared to deal with the consequences.
The increases, when they come, are expected to be incremental, probably in 0.5% steps, and are predicted to rise to between 2.5% and 3% by 2017. It is advisable for you to prepare for this by knowing what effects rising interest rates can have on you and what action you can take if need be.
How will it affect you?
The most obvious effect will be higher repayments. Most BTL mortgages have a ‘product interest rate’ which is based on the Bank of England base rate. Therefore you will need to ask yourself if you are able to afford to pay higher rates. Interest rate rises will also affect a lender’s consideration in approving a remortgage or the purchase of a new property.
The worst case scenario would mean falling into arrears and ultimately repossession. This would not only affect you, but also your tenants. You will therefore need to address the issue as soon as you feel you might have difficulties meeting the repayments.
How can you prepare?
There are a variety of options to consider when dealing with higher repayment costs. First of all you could look into paying off your mortgage early or, if you are not tied in, consider switching to a better deal. There has certainly been a growing demand for 5 year fixed rates and NLA Mortgages currently has over 100 such products available from over 10 different lenders, so there is a fairly wide choice.
Another option could be to increase the rent, although this may not be the best way to go, as there is the risk of pushing out good tenants.
If you don’t think there will be much benefit from keeping the property, then perhaps disposal of the property might be the best option.
Of course there is also budgeting. If you have budgeted for the eventuality, the stress and burden of an increased interest rate is going to be more manageable. One way to do this is to save some of the profits. Budget for savings in your initial business plan makes sense not only because it helps with unforeseen costs, over and above routine maintenance and repairs, but can also help smooth out the cost of the higher rates.
Understanding interest rates, how they are set and the impact that they can have on your repayments is essential. NLA Landlords Guide to Interest Rates outlines the important areas which should be looked and how you can prepare yourself. The NLA would strongly advise any landlord with a mortgage to download the guide for some useful advice on how best to prepare for the inevitable interest rate rise.