With the recession showing no signs of easing, most analysts expected the Bank of England (BoE) to announce a cut as it aims to help stimulate the economy, although we have not seen this happen yet.

This is fantastic news for all of us on Tracker mortgages. Who are now getting even better cash flow form our properties. Be careful not to get used to all this extra cash. Interest rates will eventually go up again so I recommend you put this extra windfall aside to save for a rainy day.

The lower interest rates have been reflected in competitive rates being offered by lenders for new mortgages , however due to liquidity issues the banks are being very fussy about who they lend money to. Many property investors want to take advantage of the current market and buy lots of property below market value but are struggling to get the mortgages. For this reason I think many investors will be looking for new ways to buy property such as purchase lease options.

Interest rates will stay low until the economy starts to pick up, which could be some time.

One of the disadvantages of the lower interest rates is that it is killing the Pound exchange rate. I sent some money over to Spain last month and was shocked when I got less than 1 Euro for each pound. It is going to be very expensive for us to go on Holiday overseas this year and so I expect there will be a boom in UK holidays this year, as people chose to stay at home which will of course help the economy.

We will have to wait and see if BoE interest rates are cut further next month.

Kind regards,

Simon Zutshi

I was surprised to see such a big cut in the base rate of 1.5% in one month. I thought the cuts would be steady, but I guess this may be due to pressure from the Government put on the, totally independent, Bank of England. Many people are predicting further interest rate cuts in December but I would not be surprised if the Bank of England wait until the new year, to fully asses the impact of the November rate reduction. Then again, nothing would surprise me now.

A few other considerations for investors are as follows:

With the improved cash flow for many home owners I think we will see a reduction in the number of motivated sellers who need to sell their homes quickly. With lower monthly interest payments, sellers with a property on the market may be prepared to hang on longer to see if they can get a better price. Having said this, there will always be motivated sellers who need to sell quickly.

The point where the market bottoms out and starts to go up again may be sooner now that interest rates are lower. It will become even more affordable for first time buyers to get on the property ladder and once they do, prices will start to recover and the amateur investors will also jump back into the market keen to take advantage of the much lower purchase prices. The availability of mortgages is still an issue and we need the LIBOR rate to drop, to see the effect on new mortgages being offered. This has started to happen as we have seen a number of lenders come out with good low mortgage rates last week. The best Buy to Let mortgage that I saw was a 4.69% fixed rate with a rent multiplier of 125%. If you can’t make you deal stack up on those figures, guest what…it is not a very good deal!

There are currently 95% Loan to Value (LTV) residential mortgages available although I doubt many first time buyers know that due to the doom and gloom image presented by the media. The maximum LTV for most Buy to let mortgages is still generally 75% and will probably be so while prices are still failing, but I imagine will return to 85% when the market starts to go up.

Will the house prices go up again? Yes of course they will. It is a simple matter of supply and demand. At the moment we have a short term over supply as there are not enough buyers in the market but this will change. We live on an island, a very popular island, with an increasing population and changing social demographic trends which means that we will not have enough accommodation for everyone. Long term demand will outstrip supply and prices will have to go up.

My guess (and that is all it is) is that it may take 2 to 3 years form prices to bottom out and come back to what they were, and then another 7 to 9 years beyond that for prices to double again. By the way, if you don’t think prices will go up again you should not be buying property as it is the long term capital growth that really makes you rich, although you should only be buying property now that makes a cash flow now.

Kind regards

Simon Zutshi

Most investors moan about having to pay stamp duty which is currently 1% for purchases from £125,000 to £250,000, 3% on purchases between £250,00 and £500,000 and a whopping 4% on purchases over £500,000. Having said this I have many clients in Ireland where the stamp duty goes up as high as 9% for some investment properties!

The government has benefited from a stamp duty bonanza over the last decade as the number of purchases has dramatically increased which has also driven up the value. In 1997 when labour came to power, stamp duty was worth approx £675million a year. 10 years later it is worth a whopping £6.4 Billion. All this money just goes into the general pot. Talk about stealth taxes! But as the market is slowing there are increasing calls by industry experts for the Chancellor to suspend stamp duty on properties up to £250,000 in value as this may help to kick start the housing market and help out the first time buyers who always seem to struggle to get on the housing market no matter what is happening to prices. We shall have to wait and see with crossed fingers what Mr Darling does in his Budget.

Now is a fantastic time to invest in property as we have 3 factors working in our favour for the very first time in history. Theses are:

1) Falling house prices: I don’t think prices will fall as much as some of the doom mongers are predicting but the fact is that most sellers think the market is going to come down, which means that they are more motivated to sell and so may well consider a much lower offer that they would not have entertained six months ago. Great if you are buying more property like us.
2) Rising rents: Over the last six yeas property prices have shot up whereas rents have failed to keep up. However, now the prices have slowed and are even starting to decline ,rents are actually starting to rise. This makes it easier to get investments to “stack up.
3) Falling interest rates. At last interest rates are on their way down again. In December we had the first .25% interest rate cut and then another .25% cut to bring the bank of England Base rate down to 5.25%. As long as the mortgage lenders pass on the benefit this means that more deals will stack up and so it will be easier to purchase.

These three factors mean that there is currently a great opportunity for your to acquire property. As long as you are buying for the long term and make sure you can cover the short term holding costs such as voids then you cant really go wrong. The biggest challenge you will face will be competing with all of the other savvy investors in the great Property rush of 2008. To find out how to ethically beat these other investors you may want to check out this month’s PIN evening seminars in London and Birmingham.

Simon Zutshi