The last few years have been characterised by high inflation and rising living costs. In response, the Bank of England (BoE) has raised its base rate multiple times to control inflation.
While rising interest rates may be welcome news for savers, they have also caused an increase in mortgage costs, and this could affect your property investments.
According to the HomeOwners Alliance, the average interest rate on a fixed buy-to-let mortgage in September 2022 was 4.67%. By September 2023, it had increased to 6.54%.
This could pose a challenge for property investors, as the latest figures show that rents are not increasing as quickly as mortgage costs. As reported by FTAdviser, mortgage rates have risen by 13% year-on-year, while average rent has only increased by 9.9%.
As a result, many property investors are concerned about high interest rates. Fortunately, they may not affect you as much as you think, depending on what your long-term investment goals are.
Read on to learn how rising interest rates could affect your property portfolio.
Your net income from property investments is likely to be reduced
Typically, property investments can be used to generate a regular income by charging rent. Once you pay the mortgage and any other expenses, such as maintenance, everything you have left over is your net income.
Unfortunately, as interest rates rise, your net income from property investments is likely to be reduced, because a larger portion of the rent you receive may go towards the mortgage each month.
If you are currently on a fixed-rate mortgage, you will not experience a change right away. Yet, when your fixed-rate deal comes to an end, your costs are likely to increase while interest rates are rising.
Say, for example, you have a £150,000 mortgage with a 30-year term and the average buy-to-let interest rate from September 2022 of 4.67%. Using figures from the MoneySavingExpert mortgage calculator, your monthly payment would be £775.
If you were to charge £1,000 a month in rent, you would have £225 net income (excluding maintenance and other costs) after paying the mortgage.
However, if your fixed deal ended and you changed to a similar mortgage with the average September 2023 interest rate of 6.54%, your monthly mortgage payment would have increased to £952.
This only leaves you with £48 net income, assuming you continued to charge £1,000 in rent.
As a result, high interest rates could pose a significant challenge if you are no longer playing professional rugby, and you rely on rental income to cover a portion of your living expenses.
While you may be able to increase the rent to account for rising mortgage costs, charging too much could mean that you have difficulty finding tenants. Additionally, you can normally only raise the rent once a year for tenants on a rolling contract. If it is a fixed-term contract, the tenant must agree before you can raise the rent.
As such, it may not be especially easy to accommodate rising interest rates by increasing the rent.
Property values have appreciated in value over time
Rental income is only one potential advantage of investing in property. You could also benefit from capital appreciation as house prices rise in the future.
You may decide to invest in property while you are still playing, so when you retire from professional rugby, you can either use it to generate an income or sell it to fund your retirement.
If you plan to sell the property at a later date, you may not need to worry about rising mortgage costs as much. Instead, you will likely need to focus on property values.
Fortunately, the latest figures from the Office for National Statistics (ONS) show that the average UK house price in the 12 months to September 2023 was £291,000.
This is a significant rise compared with historical property values. For example, according to the Land Registry, in August 2003, the average UK house price was £133,132. Consequently, the value of your investment could grow over time. Of course, historical performance is not necessarily an indicator of future performance.
Additionally, the BoE chose to keep the base rate at 5.25% in its most recent review in November, instead of increasing it again. This could mean that interest rates begin to stabilise and mortgages become more accessible in the near future. If this happens, property prices may increase at a faster rate as the market becomes more competitive.
It is important to keep your investing goals in mind
It is easy to panic when you see that your monthly mortgage payment is increasing. However, when making any decisions about your property investments, always keep your investing goals in mind.
If you are still playing professional rugby, you are likely not reliant on the income from your rental properties to cover your living expenses. In this case, your goal may not be to generate short-term returns, but rather to grow your wealth over time so you can rely on it when you retire.
Despite increased mortgage costs, you may still be working towards this goal as property values could increase over time.
Conversely, if you have retired and your property investment generates valuable income for you, then rising interest rates may affect you more acutely. In this instance, you may need to seek professional advice and consider your options.
Get in touch
If you would like help organising your wealth as a professional rugby player, then please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.
Think carefully before securing other debts against your home.
