Interest rates have now been at their record low of 0.5 per cent for 15 consecutive months. This unprecedented situation, which came about as a result of the government and Bank of England’s attempts to stimulate the economy, has been very good news for those with mortgages or business loans. Borrowing has been cheap, and many landlords and business owners have enjoyed relatively low repayments on their debt.
But it is impossible for this situation to continue forever. At some point in the coming months, interest rates will begin to rise; a recent survey of economists by Reuters suggested that this will happen early next year.
Landlords and business owners need to be prepared for this rise. An increase in rates will hit your bottom line and make a dent in your cashflow – so it is vital that you plan ahead in order to minimise the impact.
How will a rate rise affect me?
Rising rates will affect different business in different ways. The impact on your business will depend on how your borrowing is arranged, and how dependent your customers are on credit.
- Landlord mortgages. Rising rates will obviously have a significant impact on landlords. The nature of your mortgage will determine how much a rate rise is likely to affect your cashflow. If you are on a variable-rate deal, an increase in the base rate could significantly increase your monthly repayments. Even those on fixed rate or introductory terms will have to plan ahead, remembering that the cost of their repayments will be higher when their fixed rate term ends and they re-mortgage or move onto a variable rate.
- Business loans. If you have a business loan, it may or may not rise in accordance with base rates. Some loans are pegged to base rates (or, more accurately, to your bank’s base rate, which in turn moves with base), while others are priced purely according to risk. Alternatively you may have a capped rate loan – meaning that the cost of your repayments can go up, but only to a previously agreed limit.
Should I change my mortgage?
If you currently have a variable rate mortgage but are concerned about the prospect of rising rates, you might well be considering moving to a fixed-rate deal instead. There are a few things to consider here.
First of all, as base rates are currently low, trackers and variable rate mortgages are still cheap. At the time of writing there is a deal at 3.64 per cent on offer, with a 60 per cent loan-to-value ratio. Fixed rate mortgages are comparatively expensive; you will be hard-pushed to find a buy-to-let loan at a fixed rate of much less than 4.6 per cent.
Moving from a tracker or variable rate to a fixed rate mortgage is therefore something of a gamble. Analysts are divided on how sharply rates are likely to rise; some believe that the Bank of England will ratchet up rates relatively slowly, while others expect to see a very pronounced spike. Moving to a fixed rate that is one or more per cent higher than your current variable is, as a result, quite a risk – but if rates rise sharply, you stand to save.
How can I minimise the impact?
As a mortgage holder, you can help to minimise the impact of rate rises by making overpayments now. Depending on your arrangement with your lender, making overpayments now may mean that you can take payment holidays in the future, or reduce your repayments in the event of a future rate rise.
You can also minimise the impact as a business loan holder by paying down your debt more quickly. In both circumstances, though, you should check with your lender before making extra payments; some will charge early repayment fees which may outweigh your savings.
If you choose not to refinance or increase your repayments, you should make sure that your financial forecasts change to reflect the increase costs of servicing your debt. If yours is a consumer-facing business you should also remember that many of your customers may also struggle with the increased cost of borrowing. As such, both footfall and turnover may go down.
It is inevitable that rates will rise. The big questions facing landlords and business owners are: when, and by how much? There is a sense amongst analysts that businesses should be prepared for the worst. By thinking ahead you can minimise the impact on your wallet, and successfully navigate your business through the choppy waters of rising rates.