The Bank of England’s decision to raise interest rates by 0.25% last week could be a sign of things to come, and that is why DJ Alexander Ltd is encouraging buy-to-let landlords to remortgage now.
The property management firm has found that around one in three landlords are already paying too much for their mortgages and an interest rate hike will only exacerbate this position.
Alan Kent, head of financial services at DJ Alexander Ltd, commented: “We have already seen landlords who have had the same mortgage for years and are experiencing falling yields and the likelihood of further interest rate rises will only compound this situation.
“If a landlord is on a lender’s standard variable rate, then it is highly likely that this will increase with each interest rate rise resulting in an erosion of the profitability of the property investment.”
“The latest increase of 0.25% in the base rate is the highest it has been since March 2009 and there are signs that the Bank of England will start to increase rates on a regular basis.
“For many landlords and property investors this could be bad news if they are heavily geared and facing limited potential for income growth.”
Kent believes that many mortgage lenders will come under some scrutiny as they pass these rates on to their own variable rate offerings.
He continued: “A decade ago the base rate was 5% and lenders variable rates were typically 1-2% higher, however through-out Q4 of 2008 and Q1 of 2009, there was a sharp reduction in the base rate but not a comparable reduction in rates charged to customers. It will be interesting to see whether lenders will be keener to pass on these interest rate increases in contrast to their reluctance to reduce rates ten years ago.”
“Consumers, and this includes landlords and property investors, must ensure that they shop around to get the best rate for themselves. This interest rate cut, and any subsequent ones may provide a source of competition between lenders who wish to attract new business. It is important that landlords monitor their borrowing costs closely and shift lenders and rates where possible to give themselves the greatest opportunity for an improved yield on their investment.”
“Of course financing is just one of the key elements of successful property investment, but it is a core part of the business and all too often is left unchecked. The Bank of England’s decision to raise rates should be a spur for landlords and investors to look at their borrowings and act now before further increases occur.”