Time to ditch the tracker?
Since the recent base rate change, the one question I get asked the most is 'What is happening to interest rates?'. If I knew the answer to that question, I would probably be a lot richer and Mrs Malik would be a lot nice to me. We need to go to the reason behind why people are so interested in interest rates now and in the future.
In my day job, I come across people who have been able to borrow money very cheaply. Most of this stems from trackers that they took before the credit crunch which had no floor. Therefore, when interest rates fell, so did their payments. Shortly before the credit crunch one of the best deals that I witnessed was 0.17% above base for the lifetime Can you believe it? The money that has been saved in the 'Golden Decade' by many people has been phenomenal whilst properties have generally appreciated creating real and false wealth. However, last week the decision to increase the base rate has led many ask the question, 'have the good times ended?'.
In the last few days, we have been revisiting clients who have held on to their pre-credit crunch deals for dear life and been asking them, if interest rates increased in the future, what impact would that have on you? Last weeks base rate increase of 0.25% would have little impact on one's mortgage payments if they were on base rate related products. However, if further increases happen in the next few years as many commentators predict, what effect will that have on you & your bottom line?
Buy to let landlords are not immune to this. If anything, with changes in taxation, those with large portfolios should really be assessing their cash flow under various circumstances over the short, medium and long-term. You do not need any fancy accounting software, a simple excel spreadsheet will suffice but if you are running your portfolio as a business you need to see what implications external shocks will have on your profitability. Factor in the costs of running your portfolio, income, rental voids and increasing interest rates. Is your portfolio still profitable? What is the point that the cracks start to appear? In an increasing climate of instability, burying your head in the sand will not help.
Since the rate increase, there has not been a mad rush to reprice fixed rates as many lenders had already factored in the increase. There was no Armageddon or mass panic. Life goes on. However, the first base rate increase in 10 years should lead you to reassess your finances (unless you have already fixed). Trackers track (the clue is in the name). If the potential volatility of payments is going to keep you up at night is it right for you? By the way, if you do find a crystal ball and can see what's going to happen to rates in the future, please let me know but don't tell Mrs Malik!
The contents of this article are for the purposes of general awareness only and not constitute advice. Readers should take appropriate professional advice upon their own particular circumstances. The author does not accept liability for any errors or omissions.