What will happen when rates rise?

Author: David Whittaker Posted on: 05 July 2011

Whilst Mervyn King is coming under pressure to raise Base Rate in the UK there still appears to be a concensus that nothing much will happen before 2012.

Landlords have generally had a benign two years with low interest rates and improving rental yields. Voids are low and landlords are generally enjoying strong positive cashflow. The majority have been able to put money to one side against the day when Base Rate rises significantly. On a typical BTL yielding 5.3% where a landlord has borrowed 75% of the value of the property the cost of borrowing will only become an issue when the interest rate inclusive of margin exceeds 6.25% having paid letting agent and other associated costs.

The issue for Richard Banks of UKAR with his BTL borrowers inherited within the BBG portfolio is concentration with a number of landlords who were borrowers of not only Mortgage Express but also GMAC. GMAC had sold loan portfolios to BBG at the top of the market. When one of these landlords experiences problems the impact is felt across a larger number of accounts. Many landlords also had loans with American Investment Banks who have discounted loan balances to encourage early redemption; some will plead poverty to other lenders in the hope of achieving discounts on further loans and UKAR will be perceived as “fair game” in such negotiations. Ironically UKAR is least likely to offer such discounts as it will take the long term view.

Landlords should only start to feel the pinch in late 2012 moving into early 2013 and those who are highly geared will need to review their options at that time.