Following hot on the heels of the excitement of the last general election, the chancellor has recently released a budget which has made for interesting reading and also gives us further clues on the direction the government is taking towards landlords in the private sector.
One of the changes being made was the tax free incentive on loan interest which would eventually be phased down to 20%, but in all likelihood it's probable that the government might even phase this benefit out completely in the future.
Following this there's been a lot of press around the BTL market and especially in the last few days further talk about interest rate increases in the near future. Who know's when exactly this is going to happen since it has been talked about for at least the last 2 years, but most agree that it's something that is definitely coming.
People are asking what happens to their portfolios when interest rates do go up?
The most obvious first thing is that mortgage payments will increase, which would put a squeeze on landlord profits. What might happen as a result of this is that rents go up as landlords try to make their losses less.
In most markets where further legislation or market forces change the fortunes of landlords, it's usually the tenants that bear the brunt of the cost. Unfortunately this happens because the dynamics make it so.
When interest rates increase there are also less people who can afford to buy because lending costs are so much higher. This pushes potential first time buyers out of the market and forces them to continue renting. Demand for rentals goes up and landlords have their pick of tenants, so rents go up as a result. Furthermore, this means there is less competition for professional investors as prices start to stagnate yet finance costs has meant these types of property are no longer affordable to first time buyers.
An additional knock on effect of an interest rate rise could be that many home owners, especially new home owners, are forced to sell because they can no longer afford the mortgage payments, which in turn also means more opportunity for professional investors.
To cap it all off, all this means that the rental market is suddenly flooded with lots of new potential tenants as less people can afford to buy or own and that pushes up the rental prices. This is basic market supply and demand.
For the landlord who has a small working portfolio, it might be time to revise your rents and see if you can put it up a little. Also it's time to look around and see if you can re-mortgage onto a better rate, perhaps even a fixed rate for a longer period like 5 years.
If you do the maths, you might even be able to leverage out some further equity from your portfolio as a result of the rental increase as this means you have the capacity to borrow more, and that means more investment properties.
All in all, it sounds like a rate increase isn't so bad after all!