After reading How to own the world, by Andrew Craig, I’ve been reading Moneyweek for the last few years. One of the constants each week, is that inflation is coming. Whether you believe that to be true or not, it is worth doing some research on the subject.
The Great Financial crisis of 2008, led to QE (quantitative easing). Basically, the likes of the US and the UK printing shit loads of cash. And if you believe what many experts are saying (like experts in MW), this will lead to inflation.
Inflation is basically the decline of purchasing power of a certain currency over time. With rising inflation our pound (here in the UK) is getting weaker.
QE causes inflation because an increase in supply, weakens the value of currency. With this, QE reduces the purchasing power of the pound in the UK. If you look at Bitcoin, the supply is limited to 21 million. This is a reason why many believe the value will increase significantly in the future.
The price of bread also contributes to inflation. If the cost of goods increases (e.g. bread), this again reduces purchasing power of our pound.
Going back to How to own the world, you will learn all about interest rates and inflation. For example, if you earn 2% in your savings for a given year, the inflation rate might be 3%. This mean your real interest on your savings is -1%. Trust me, interest rates and inflation is worth understanding.
What does rising interest rates mean for your properties?
With rising inflation, interest rates tend to rise as they are linked. What if these interest rates went back to the early 90s. In 1992, the interest rates were at about 10%. Imagine your mortgage payments if the interest rate jumped to 10%. This would cause serious pain for property investors who chose a variable mortgage product. Hopefully, this won’t happen, but it is worth doing some research into your mortgage products and the impact of potential inflation.
The current Bank of England base rate is 0.1%. And mortgage products are linked to the Bank of England base rate. According to WHICH, this figure was at 5% before the 2008 financial crisis. Hopefully, this won’t happen, but it is worth doing some research into your mortgage products and the impact of potential inflation.
If you have a variable rate product and the Bank of England base rate goes from 0.1% to 5%, then your mortgage interest is going up by a couple of % also. This means a few hundred pounds when you look further into it. This may eat into your profits or worse still, mean you lose money each month.
Being a wise investor, you might have a fixed rate mortgage product, and this will insulate you from this scenario. At least in the short-term. When you listen to property experts like Simon Zutshi, he recommends 5-year fixed products to insulate you against this type of scenario.
DUFFMONEY’s current mortgage situation
Me and Mrs Duffy like a bit of diversification in our lives. And our mortgage products are no different. Our current portfolio is made up of 7 single lets. We have 4 personal properties in Mrs Duffy’s name, and these are on repayment. And are fixed on 2- or 5-years deals.
With DUFF PROPERTIES, the 3 properties are interest only and are fixed on 2-year deals. Thinking about what could possibly happen with inflation and rising interest rates, I may have made a little mistake with the 2-year deals. Maybe I should have gone with the 5-year deals?
We like this balanced approach because we benefit from positive cashflow (mainly from DUFF PROPERTIES) and the 4 personal properties will be paid off in x amount of years.
As I’m writing this week’s blog, I’m thinking that I will stick with interest only with DUFF PROPERTIES. This will mean cashflow that I can use to continue to build the current portfolio. The aim over the next few years is that property can become my full-time job.
This means x number of properties bringing in a certain amount of money pcm. Big rises in interest, will have a negative impact on my plans but I’m hoping my fixed rate products will give me enough short-term insulation. Then it will be a case of over paying the mortgages with any profits from rental income.
One of the things I have learned in the last 19 years of property investing, is that you have to expect the unexpected.
What to do
Don’t just assume that interest rates will remain at rock bottom levels for the foreseeable future. Never assume anything.
Have a good look into inflation and the potential rise in interest rates. Get very familiar with your mortgage products. And hopefully you will be fully aware of the effects that rising interest rates will have on your property business. If you find it hard to understand, speak to a suitable FA (Financial Advisor).
Book of the week: Quit like a millionaire, by Kristy Shen and Bryce Leung. An excellent guide to managing your money and building your wealth. With a mathematically proven approach to saving, investing and spending, this book will help you towards financial independence.
For a hard copy visit the excellent Imagined Things Bookshop: https://imaginedthings.co.uk/