Have we Climbed our Interest Rate Everest 🏔

So the Bank of England, last Thursday, increased rates from 3.5% to 4%.

What a year it’s been for landlords. Over the past year, rates have gone from 0.1% to 4%, that’s a 400% increase!

It’s been a hell of an adjustment, excuse my French. We’ve gone from a very stable low-interest rate environment back to what we’d call normal interest rates if we’re in our 40s.

This has primarily been caused by the high inflation we’ve had in the UK, currently around 10%, and the Bank of England’s response to it.

Where do I think we are on rates?

Rising interest rates is like pushing down a brake in the economy, in the past it would effect most people but due to the fact companies and most people now have their debt fixed for a period of time it only effects a small amount of people.

If we say only 20% of people have a mortgage which moves with interest rates (the rest are still on fixed rates). Then the BOE has pushed down incredibly hard on those 20% by pushing up rates and slowing the economy.

The thing is if another 20% of people roll off their fixed rates in a years time, that means now 40% of people will be effected by these interest rate rises (we’ve doubled the pressure on the economy).

Will a 4% interest rate be needed when another 20% of people feel the effect, and so and so forth over the next couple of years.

4% interest rates as time goes by will have more and more of an effect on the economy purely due to the fact we all have to re-mortgage.

We’re all due an interest rate shock of about 2-3% when we re-mortgage that’s going to make us all £2-£3k poorer per £100k of debt we have.

What does this mean?

The Bank of England in their muddled way of talking have said that they’re adopting a wait and see approach, they want to see the effect of the interest rate rises on the economy before deciding if any further rises are required.

This is definitely the right approach since the effect will increase as time goes by and people have to re-mortgage.

Where do I see interest rates going?

I personally think we’ve summited on interest rates, or if not, we’re very close. There’s a lot of pain now in the economy, especially for those on floating rates, and there’s further pain to come for those who aren’t.

The right rate for the economy is probably lower once everyone begins to roll off their fixed rates and have to re-mortgage at a higher level. That’s why I think we’ll see the debate on interest rates being cut begin to rage at the end of the year, when inflation swiftly declines as energy costs roll out of the system.

How are we trying to mitigate this?

Unfortunately we’re having to lift rents. Rents over the last year have moved significantly higher and so we have to move rents to the new market level as well helping landlords manage their increased mortgage costs.

Are we being fair to our tenants?

Our methodology when raising rents, is to keep them 5% below the market rent. This ensures we’re being fair to our tenants but also means they’re unlikely to move, since rents elsewhere would be more expensive. As a result we hope our tenants stay in their homes and as a consequence our landlords don’t have any voids which will help with their increased costs.

What to do next?

I think it’s going to be a bumpy year and, as Sir Alex Ferguson once said, it’s going to be squeaky bum time. However, we have been managing and helping landlords for over 15 years now, so rest assured we’ll help in anyway we can to get you through this period.

Remember it’s our job to GENERATE YOU LONG-TERM WEALTH FROM PROPERTY!