03/08/2018 by Robin Gregson
Base Rate Rise: the Impact
On Thursday 2nd August 2018, the Bank of England's Monetary Policy Committee raised the base rate of lending to 0.75%. The move had long been expected, so it took few by surprise, but the 0.25% increase does inevitably raise questions about its likely impact on landlords.
For some buy-to-let investors, of course, it will have no immediate consequences at all. A large part of the private rental sector is made up of cash buyers and 'accidental landlords' who, having inherited property, choose to let rather than sell it. For this mortgage-free section of the market, a change in base rate has little or no direct impact.
However, there is another sizeable portion of the sector that does rely on finance. Investors with buy-to-let mortgages fall into two major categories - those with fixed rate deals, and those on variable rates. Those operating on a fixed rate basis will see no change in their repayment costs until such time as their contract period expires. In the short term, it is only those with variable rate mortgages who are likely to be significantly affected.
In recent years, the number of landlords opting for variable rate deals has fallen. According to the 2018 Buy to Let Mortgage Index published by Mortgages for Business, 93% of all new BTL mortgages arranged in the second quarter of this year were agreed at fixed rates. That's a sizeable majority, and most of these deals were for relatively long periods - typically for five years. This will keep a good number of investors well insulated against rising costs. Nevertheless, this does leave a minority of landlords for whom the increased cost of borrowing will have an adverse impact. The National Landlords Association estimates that the average value of BTL borrowing is approximately £77,000 and, on that, the extra 0.25% will equate to an added cost of £16 per month. In itself, that is a relatively small sum, but it could raise profitability concerns for those landlords already operating with very tight margins.
Yields and Profitability
A rise of 0.25% is modest by any standards, and it was widely predicted. The new rate of 0.75% is still exceptionally low in historical terms and it should certainly not be enough jeopardise a well-chosen investment. Faced with this widely predicted increase, some investors may simply absorb the added cost, while others will pass some or all of it on in the form of increased rents.
However, the hike in costs does serve to focus attention on profitability. There are some sections of the BTL market that deliver very small margins, and it is here - usually at the lower end of the quality scale - that base rate rises tend to cause the greatest financial problems. New investors will want to avoid such markets altogether, but for those landlords already operating in them, the best advice might simply be to adopt a new strategy: to sell up and, where possible, reinvest in more rewarding properties.
That, of course, is simplistic, but it stems from a simple truth. One does not need vast sums up front in order to invest in properties that deliver good, healthy returns. Across the UK, there are new-build flats and student apartments that may be secured for as little as £60,000, and yet some of these will deliver assured yields of around 7% to 8%. By contrast, £60,000 may only represent the initial down-payment on some conventional residential properties that require significant borrowing and which ultimately produce much lower yields. This is a critical consideration. Yields are one of the most important measures of an investment's success, and in cases where profit margins are becoming perilously thin, it will often pay to reconsider one's portfolio.
Investing for Security
We live in turbulent economic times, with Brexit and other matters adding to the challenges that investors normally face. However, there are numerous affordable investment opportunities that keep risk to a minimum and which offer more than enough breathing room to cope with future base rate rises. In many parts of the UK, we are seeing private investors earning rental yields of 6% to 7% on standard residential properties - that is to say, on apartments and houses in areas where demand is strong. These are returns that far surpass the rates offered on high street savings accounts, and in the longer term, they will
normally offer the additional benefit of a steady rise in capital values. Some investors can opt for properties that offer additional safeguards. For example, cash buyers may choose student properties and other new developments that offer assured yields for periods of 5 or more years. Returns of between 6% and 10% are often then achievable.
For even greater financial resilience, it can be a good idea to look for a mixed tenure development that allows investors to let their property either on a conventional basis or as a serviced apartment. The latter is becoming increasingly popular amongst both tenants and landlords, and in our experience, serviced apartments can deliver net yields of between 8% and 11%. Such returns clearly provide a more than adequate buffer against future base rate fluctuations.
The Mortgage Market
The Monetary Policy Committee has signalled that at least one more rate rise is likely before 2020. Any such changes will be small and signalled well in advance, but the truth is that the cost of borrowing is still exceptionally low and, with inflation running ahead of the Bank of England's target 2%, it is only likely to move in one direction. Faced with the prospect of further rises, most landlords are now opting for fixed rate
mortgages, and lenders are doing all they can to accommodate them. The cost of a fixed rate mortgage is not much higher than a new variable rate mortgage, and in the face of so much economic uncertainty, fixing one's costs makes a good deal of sense. What's more, the mortgage market remains very competitive and around one in five lenders are now waiving any arrangement fees; others are offering incentives including free legal support and free valuations.
For those investors who cannot afford to alter their portfolios, then there is at least the option to remortgage, and many are doing so. Indeed, recent figures suggest that the number of people remortgaging is
currently outpacing the number of people seeking to make new purchases. Thus, while future base rate rises are a factor to consider, most investors still have plenty of options to protect themselves against the worst of their effects.
* * *
If you're thinking about re-structuring your borrowing, or if you'd like to re-examine your property portfolio, please contact us today. We can put you in touch with a selection of reputable advisers and we can introduce you to a range of investment opportunities that offer exceptional yields and security.
For more details, please call our advisory team on 01244 343 355 option 1.