Over the past 13 years the UK property market has enjoyed incredibly low interest rates due to the reaction of the 2008 financial crash. The bank rate was brought to 0.5% to support the economy and has remained low ever since. But now the base rate is rising which means that those landlords who use mortgages to fund their purchases need to ensure they can survive with these rises and any future rises.
Before we start, the Bank of England base rate is set by the Monetary Policy Committee each month. This has risen significantly since December 2021 from 0.15 to 1.15% in July 2022 and in November 2022 the rate is 3%.
The base rate affects our everyday lives so how can you manage your property debt to survive this current time?
What is your mortgage product?
It is important to know if you are on a fixed mortgage or a variable mortgage. According to Halifax, a fixed rate mortgage is a type of mortgage where the interest rate on your mortgage stays the same, for the duration of your deal. The other type is a standard variable mortgage where your mortgage payments could change each month, going up or down depending on the rate (Natwest).
The benefit of a fixed rate mortgage is you know your monthly payments and this does not alter: this can help with budgeting. But the base rate fluctuations could mean that you have fixed a rate that is higher than todays base rate, so you end up paying more per month than a variable rate mortgage would have charged. The positive for a variable rate (especially if your a gambling person) is you could enjoy very low rates for many months or years, but you do not know when this enjoyment of low payments will end. You need to make sure you can absorb and survive a rate increase like we are seeing now.
An example, if the mortgage rate is 1.75% above the base rate (today it is 3%) then you have a mortgage rate of 4.75%. but when you were enjoying a bank rate of 0.25% your mortgage rate was 2%. This can be a huge financial impact when you are speaking of a landlords whole portfolio.
When was your last mortgage review?
A healthy way to operate a business is by regularly reviewing your business and a close look at your debt is key to your financial position review. Some lenders do not review your case until you are 3 months from the product expiring, such as Birmingham Midshire and like my quote from Kent Reliance they have had our application from for nearly 3 months with the mortgage costs per month rising each month. So take a look at when your mortgage products are ending and contact your broker well in advance to ensure you are not caught out.
I would suggest stress testing your portfolio using different base rates to see what causes this has on your cash flow at the end of each month, and to ensure that mortgage payments are not missed which will damage your credit history.
What to do next?
It maybe worth considering remortgaging the expensive products as mortgages are based on loan to value basis, and if the value of the property has risen you maybe able to get a better rate and borrow less. But watch out for your early payment penalties.
Could you sell any low performance properties?
Could you speak to another broker to hear their perspective on your portfolio and could they better your debt position?
Could you increase the rent to offset any mortgage payment rises? This has to be done carefully and an option we have not done with one of our BTL's as it would out price us competitively from the rental market. We still have a positive cash flow from this BTL and will keep a close eye on our performance.
Have you got the funds to pay down the mortgage? We have decided to do this on a HMO. Instead of investing in further properties we have paid a large sum off the debt owed to bring the mortgage payments down. This will future proof our cashflow allowing our business funds to grow and then buy in cash future projects. Although this is the slowest way to grow in the current climate we feel it is the most sensible strategy to protect our business.
The big question for you to ask is how robust is your business to changes in the base rate, and can how far can your stress tests go before they break your business?
