Property Investor Beware, Interest rates may be rising, panic not!

Property Investor Beware, Interest rates may be rising, panic not!

Interest rates risingBuy to let interest rates should you panic?

For the first time in a long time the Bank of England governor Mark Carney hinted that there might be an interest rate rise sooner than otherwise expected. Most people were not expecting a rise until next year and to put things in perspective that may still be the case. The prediction now, though is that they could rise before Christmas. Property investor – beware, interest rates may well be rising soon. Should you panic – absolutely not, you should be prepared. It will be tough to take though for many investors who have only just got their heads around the new BTL tax changes currently being implemented.

Buy to let: 7 steps to successful investingWhy might interest rates rise?

The main reason is down to that thing called inflation which is rising faster than expected. When inflation rises, interest rates are often used as a counter-measure so that it falls again. Let’s face it, we have never had it so good in terms of interest rates that have been low for years and anyone who has lived long enough knows this would not continue forever. Most investors are prepared for this contingency and any new buy to let mortgage loans should have the potential for rises built in as new affordability criteria was added this year. See my video and posts on affordability criteria if you want to know what that means.

How to Prepare for interest rate rises as a BTL Investor

In both of my longer books I discuss affordability and not over-borrowing so really, if you have followed this advice or that of others, you will not be in that position. Also new affordability criteria for this year factored in interest rate rises to prevent investors from over-leveraging themselves.

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    If you have not prepared though, there are a few things you should do now – don’t wait for the rises:

    Assess your property portfolio

    Assess your portfolio and make sure that you have enough profit to cover any rise in interest rates – in other words, your rental income should be providing you with enough profit to cover any rises and still pay your tax bill without losing money

    Factor in BTL Tax Changes

    Remember to factor in the tax changes that are being implemented from this year because when interest rates rise we will all be getting a double whammy! This will be worse from next April when only 50% of interest will attract full tax relief and the rest 20%.

    Unfortunately, in previous years interest rates rise would have meant that your profits would be slightly lower, hence your tax bill would be lower too – but the tax changes for landlords make this complicated because the pre-tax profits will now be higher each year until full implementation. I know that sounds double dutch but how profits are affected by tax changes is explained in my other posts, videos, and books. The tax changes do not really affect you if you are a standard rate tax payer unless you are pushed into the higher rate tax band.

    The tax threshold increase implemented by the government will help some stay out of being pushed into the higher rate tax band. You will need to see my other posts and videos for more information on this. It is also covered in three of my books.

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      Consider paying off a lump sum

      buy to let infoIf an interest rate rise will leave you sailing a bit too close to the wind but are sitting on historical profit in the bank, you can either  pay the extra when it comes or make a lump sum payment off of your buy to let mortgage. Most lenders allow for up to 10% during discounted loan periods, even on interest only mortgages without penalty – read the small print.

      Increase rents – but comes with health warning!

      If you have not put rent up for a while it may be time to increase rent – remember that in the news this week, the majority of salaries for people have increased and rent reviews are allowed.

      rent rises

      You need to follow correct procedure and if you do not have possibility of rent rise in your Assured Shorthold Tenancy agreement you will need to wait for the next one. You must also give tenants notice in writing of a rent increase. Check on a property portal to see what the current rents are to make sure you are not being unreasonable. Avoid huge rent hikes, it is better to keep the property let than to lose tenants but a small increase will be acceptable to the majority of tenants. I review rents every two years or if there are any major changes to legislation I do it sooner. Some letting agents do this annually – I wouldn’t recommend less than annual or you will have a high tenant turnover which is costly because of advertising and void periods.

      Keep your properties let

      Keep your properties let. Look after your tenants and your properties and you will usually not have as many void periods. If the property remains let you should be ok if you have not over-borrowed. Do anything you can to make sure that your properties remain attractive to tenants but obviously you need to balance your need for profits.

      If you look after tenants and screen well in the first place, they will usually accept reasonable rent increases as part of life and they will still want to stay with you because you are a good landlord. I have a really stringent screening criteria and it has certainly paid off for me. Again there is lots of information about this – particularly in my Buy to Let: 7 steps to successful investing book.

      Sell a property?

      If you are not making profit you may want to consider selling a profit, taking into account your annual capital gains allowance and any capital gains tax you may have to pay – more details in my books. This is more likely to apply if you have had a change in your own financial circumstances or have over-leveraged to build up your portfolio.

      If you have put money away to allow for interest rate rises you may be ok but keep a close eye on your profit and loss. Avoid loss – overall because it will give you sleepless nights.

      Conclusion

      Be prepared now – to be honest, most landlords have been waiting for this to happen. Assume it will happen and even if it doesn’t you will have re-evaluated your portfolio which is always a good thing to do anyway. The hard part for landlords is that this news comes in a year when most are only just getting their heads around the new buy to let tax changes that are currently being implemented. Property is still a great investment as long as you manage risks. If interest rates do rise the pound will get stronger – it already surged yesterday and at least you will get more for your money when you go abroad!

      As always, happy investing!

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