The Ukraine-Russia war has had a serious implication on global energy supply chains and the all-time high inflation has affected the cost of living, creating uncertainty in the housing market, especially after the mini-budget.
Whether you wish to sell your property or want to rent out a home, our estate agents in London Bridge will provide you with a comprehensive catalog list to assist you in finding your ideal property.
Buy-to-Let mortgages
If you are one of those individuals who is buying a property to rent it out further, in other words, you want to be a landlord, you will have to understand the basics first by applying for a buy-to-let mortgage. A buy-to-let mortgage is a distinct type of mortgage created for investors who want to earn rent from their purchased property by letting it to tenants. It is different from residential mortgages where an individual buys property for living there himself.
Workings of a Buy-to-Let mortgage
Here are the key ways in which a buy-to-let mortgage works-
This specific mortgage type can only be obtained on an interest basis. That means you would be paying only the interest accrued on the mortgage taken. The original capital (loan) will have to be paid at the end of the mortgage term. For instance- through savings, to pay off the mortgage, or selling the property.
Proof of rental income expected to be generated from the property would be needed to be provided to the lender. The rental cover must be greater than the mortgage interest ranging between 125% to 145%, in short, the income from the rent must be greater than the interest repayment amount.
Effect of Interest rates
Interest rates are one of the key areas, which define an estate market. Let’s assess the impact of various changes in interest rates in buy-to-let mortgages and investments
Borrowing costs
With lower interest rates it becomes much easier and inexpensive to obtain a mortgage, as the cost of borrowing is low. This results in a higher demand for buy-to-let mortgages as it is more affordable for landlords to acquire money at a lower rate. This is conversely true when the interest rates are high. The demand drops and it becomes quite expensive to secure mortgages and landlords struggle to repay the interest.
Mortgage Repayments
Buy-to-Let mortgages are usually more costly than residential mortgages. Therefore, with the rise in interest rates, the potential profits for a landlord are hampered, as the cost of repayment of the mortgage increases. In the same way, a decrease in interest rate increases the profits of a landlord as the cost of repayments are lower.
Rental Demands
With rising interest rates and mortgage repayments becoming pricier, it discourages potential buyers from purchasing property, and the demand for renting out property increases. As people prefer renting rather than buying, the landlords have surplus gains as there is an increase in rental yields.
Action Plan for Landlords and investors
As the Bank Of England increases the base interest rate, like many homeowners, buy-to-let investors and landlords with mortgages having fixed rate agreements of two or five years, are safe from any immediate effects on their finances. However, investors due for refinancing would have to select from the fewer deals in the market with higher rates than previously offered.
- Appraise your portfolio and approach
Revisit your property action plan, assess your goals, and how they would be affected by a further rise in interest rates. According to James, Provestor CEO, “Assess your portfolio for weak links and liabilities. If you have a lower yield property that’s had significant capital growth, it could be a good time to sell while property prices are at their peak.”
- Evaluate the pros and cons of rising rents
Be prepared for further increases in interest to control and bring inflation down. The repercussions of this will affect the yields which would eventually be passed on to tenants. A tenant may struggle to keep up with the rents, bills, and increasing cost of living if a recession hits the economy. Work out an action plan with your tenant, which benefits you both. Investors looking for long-term growth can take advantage of buying opportunities arising from this scenario.
- Incorporate your personal properties
Landlords and investors who share extensive portfolios with partners and spouses can gain benefits of Incorporating, to avoid being tipped off into a higher tax band due to increased rents.
Summary
The landlords and investors need to continually monitor the market, examine where their monthly costs would be affected by inflation and high interest, and where can you cut their costs and save money.
