Are Interest Rates Going Up?

We had that incredibly low rate for about 10 years. Then more recently, we've seen the Bank of England base rate drop to as low as 0.1%. Now, why is this important? Many people who bought property prior to the credit crunch would get a mortgage that was based on the Bank of England base rate. So they might be paying 1.5% plus base rate. Now when the base rate was at 5%, their mortgage would be as much as 6.5%. However, for the last 10 years they've been paying mortgages of effective pay rates between 2 and 3%. This means their mortgage payments have been very, very low. So most investors have had the benefit of increased cash flow purely because the interest rates were low, not any special skill or wise investments, just because rates are low.

If rates start to go up, many property investors will have a lot less cash flow every single month. Also if they own property in their own name, we know that the government bought Section 24 back in April, 2017. People who had property in their own name, had mortgages and were higher rate taxpayers, they're going to pay a lot more tax on their property. So if the interest rate goes up, there's this double bubble of effectively, rates going up, which means you're making less profit every single month. But as far as the tax man is concerned, if you own property in your own name and you've got a mortgage, you could actually be losing money every single month in terms of cash flow. But on paper, making a profit. So not only are you losing money every month, but also you have to pay extra tax to the taxman.

This will cause many investors a lot of financial difficulty. A lot of them might think about selling their properties, which could bring a flood of property onto the market. The property market could be affected and the market may come down.

Now why on earth is the latest announcement about having inflation just over 5%. Why is that a problem? Well, historically, the Bank of England will use interest rates as a macroeconomic tool to control inflation. So in other words, when inflation gets very high, inflation is the cost of living. This has increased in the last six months of 2021 because of costs such as transport and raw materials in building. All costs have basically gone up.

You might've noticed in supermarkets, things are costing more. So the average person has less money in their pocket because they need to spend more on all the daily living costs. Things like rent have also gone up massively, which is good for investors, not so good for tenants. So with an increase in the cost of living, the Bank of England will sometimes raise interest rates to slow the economy down. If it becomes more expensive for people and businesses to borrow money because interest rates have gone up, it slows the economy down and thus inflation comes down.

Having come through the COVID 19 pandemic, we experienced the biggest dip in GDP we have seen for literally a hundred plus years. We did have a bounce back and particularly the summer of 2021, we had an incredible bounce back. A lot of people were happy to get out of lockdown. They hadn’t been spending much money and they had a lot of money in their bank they could use. The property staycation world absolutely boomed as people didn't really want to go overseas. It was very difficult to travel overseas. They wanted a holiday in the UK. So this is what caused a massive boom in the UK economy.

So actually the UK economy has done incredibly well despite the COVID-19 pandemic. It bounced back really, really quickly. This is partly due to the government intervention through Bounce Back Loans and the Furlough Scheme.

The government, I think, handled the pandemic and the financial impact incredibly well, but there are a couple of problems. Due to the government spending so much money, everyone at some point has expected inflation. When you print money, there’s more money in circulation and you need more to buy things. There’s normal price inflation when you print loads of money and this is going to be a problem that is seen around the world. World banks, as well as the Bank of England, are going to be having this difficult decision. Do they put interest rates up to control inflation, or keep interest rates low to continue supporting the economy? It's a really difficult measure. So what does it mean for you as a property investor?

When we buy a property, we make sure the property stacks up. In other words, it's got to make money for us today. One of the golden rules I talk about in Property Magic, golden rule number three, is you must only buy property that gives us positive cashflow. Over time, rental incomes tend to increase and we've seen a massive increase over 2021. There's been a real shortage of accommodation. We've seen rents go up, which is great for landlords.

However, we need to assume, if rents are going to be at the current rate and we're paying a mortgage at a current rate, how much is that going to make us. If your mortgage rate goes up, and the Bank of England base rate comes up, you might be on a fixed mortgage at the moment. By the way, that would be my recommendation. I can't give you financial advice, but what I'm doing with all of my purchases and my remortgages is fixing the interest rate for at least five years. I'm going to pay the same amount on my interest-only mortgages every single month for the next five years, no matter what happens to the Bank of England base rates. At the end of that five-year term, I'll go onto the standard variable rate of those particular lenders, which are normally a certain rate plus Bank of England base rate.So in five years time, when you come off those, it depends what's happening to interest rates, but it means the interest rate might go up.

Although you can protect yourself by having a fixed rate, do consider that at the end of that fixed rate period, your payment might go up. So how can you protect yourself?