Soaring Interest Rates and Falling House Prices… Key Tips For Medway Property Investors

Hello Readers,

Something that I’ve been avoiding writing about for a while is increased mortgage interest rates, however with the most recent base rate rise and current house price trajectory, I thought I ought to address it.

Before looking at mortgage rates, let’s look at the market in general. Here are some key headlines:

According to the latest Nationwide House Price index, annual values were down 3.8% in July. Robert Gardner, Nationwide's chief economist explains that:

“This was the weakest outturn since July 2009, although it is only modestly lower than the -3.5% recorded last month,”

Hold up… the weakest outturn since July 2009? Wow – that’s a big place to land, but is it as bad as we expected?

Looking back at my predictions for 2023, we read that the OBR was predicting a 9-10% drop. With this perspective in mind, Zoopla’s prediction of a 5% drop doesn’t seem all that bad and for landlords, certainly there should have been enough growth since the pandemic for a 5% drop not to become an issue.

So, are we seeing a housing price crash? Chris Hodgkinson, managing director of House Buyer Bureau explained this is not the case:

“The good news is that we’re not in the midst of a market crash, albeit we are seeing a downward correction,"

Interestingly, however, Rightmove states something very different (I think it’s more realistic to trust the UK average from the Nationwide Index):

What else have we seen?

·?????House transactions for June were 15% below 2022 and around 10% below pre-pandemic levels.

·?????Activity remains 20% below 2019 levels

·?????BoE base rates further increase to 5.25%

·?????Average mortgage rates hit around 6-7%

·?????Recent ONS data shows a +4.7% rental increase on existing tenancies and a 9.1% increase on new tenancies for England (excluding London)

Let’s address mortgage interest rates as for those coming up to a remortgage, it’s something that certainly makes landlords I speak with concerned.

Let’s face it, things are bleak on this front. I’m not going to beat around the bush, and know a number of landlords who simply cannot sustain the increase and need to consider selling up.

So, where are we?

It’s very difficult to find stats on ltd company mortgage rates, so let’s look at general interest rates as ltd company rates are pretty similar as far as I know. You’ll see from the graph below, we’re sitting at the 6-7% mark.

Let’s look at how this compares against similar economies across the world.

I’ve pulled together these stats which act as an indication rather than an absolute as the data all in one place is hard to find, but it’s interesting to see how the UK sits behind economies such as the USA, Australia and New Zealand but quite ahead of the Eurozone average.

I’m no economist, but the average Eurozone base rate is 3.5% and when we compare that to the UK’s rate of 5.25% that’s probably largely why. Basically, our economy is doing worse!

The question is, what can landlords do to protect themselves and assess whether to stick or sell. As well as remembering that this is short term pain (hopefully), here are some helpful tips that I have seen recommended on LandlordZone and really do think are excellent:

1.????Check your cashflow. Create a comprehensive breakdown of your current expenses and conduct a thorough evaluation to ensure that your property remains profitable.

2.????Know the property’s current value. Assess your recent capital growth, as it might serve as compensation for any income loss or reduction in monthly profits.

3.????Work out your break-even point based on mortgage rates reaching 7-8%. Determine the potential expenses at a 7-8% interest rate to assess if your profits remain at an acceptable level. Evaluate whether you can finance any losses until mortgage rates decline, ensuring the viability of your investment.

4.????Could you refinance at a lower LTV? If the value of your property has substantially increased since your last remortgage, you might have the opportunity to secure a more favorable interest rate by refinancing at a lower Loan-to-Value (LTV) ratio.

5.????Is the property still meeting your investment objectives? Suppose your primary investment objective was capital growth to accumulate a lump sum for your retirement. In that case, as long as the property continues to generate sufficient income to cover its expenses, there might be no urgency to sell it.

Personally, my recommendation is to use this as an opportunity to revisit and strengthen your strategy. Us property investors are a hardy bunch, always looking to invest in our personal development and there’s no better way to do this than through experience!

I’d be really keen to hear your thoughts.

Hasan