What are the best options for property investment loans?
There is continued anticipation of a rise in interest rates. It is still possible though that increases may be delayed if the new Omicron variant causes further Covid related economic problems.
But it still seems highly likely that the Bank will have to step in shortly to address the increasing threat of inflation in the economy.
The yield on residential property in the North of England averages around 6%, and in the South perhaps 4%, depending on location.
So what is the impact on property values going to be?
The first thing to note is that interest rates have already gone up – but not by much when compared to historical interest rates. We are talking about fixed rates, which many people acquire when taking out business finance. We estimate that the 5 year swap rate (the basis of a 5 year fixed rate) has increased from a low of 0.15% in summer 2020 to a rate of around 1.2% now. Prior to Autumn 2019, the 5 year fixed rates were always higher than they are now, so we have had a two year window of really low rates.
This increase in fixed rates is an indication by the money markets of where variable rates might be expected to go. And indeed the Bank is suggesting that base rates will increase to around 0.75% in the next 18 months. This seems very modest when considering that inflation is already running at near 5%.
We believe that the rise in fixed rates already seen and a predicted rise in base rate to around 1% will have little impact on property values. Perhaps in the South, where property investment yields are lower, there may be a correction in values as a 1% rise in rates represents 25% of the average yield.
But in the North the rise is much less significant, especially in a historical context. One question that remains of concern is what if rates need to increase more – say to 3% or 4% which doesn’t seem out of the question in the next few years if inflation sticks around.
So generic advice for investors? For me it is to invest on the basis of strong yield and achieve excellent levels of loan repayment cover from rental income. Speculating on growth in prime property values (with consequent low rental yields) seems to be much more risky, especially at the current time.
And choosing the right loan structure is of even more importance. So this means either long term loans with low repayments, interest only loans (although we always recommend full repayment option if possible), and of course considering all the fixed interest rate options available.
With our excellent knowledge of the lender market, we keep abreast of the latest and best property funding options and will ensure that we source the best funding option for your needs!