A Silver Lining from Inflation?
The current UK inflation rate stands above 10% and we are all feeling it. From filling up with fuel to food prices, nearly everywhere the UK consumer shops is feeling their purchasing power diminish. The energy, fuel and grain crisis is making everything more expensive to produce and transport. Combine that with higher consumer demand and you can understand why prices are shooting upwards. There’s plenty of news and coverage about this, but what about landlords? You don’t hear much on how inflation is affecting them.
With reduced tax allowances, rising interest rates and higher bills affecting monthly profits, people are wondering whether a buy-to-let property is still worth it. One thing that forgets to be mentioned is that inflation may be beneficial for some landlords. Here’s why.
If you have a buy-to-let mortgage that is soon to expire, or hoping to acquire a mortgage for a buy-to-let property, rising interest rates means smaller loan-to-value offers available to you. This is because lenders require the monthly rental income to be 145% of the monthly mortgage repayments. However, rising inflation causes the value to your debt to fall over time. As most buy-to-let mortgages are interest-only, this is what happens to £200,000 interest-only over 10 years of rising interest rate.
At 0% inflation, the debt still holds the same value of £200,000.
Currently, the Bank of England’s target for inflation is 2%. That means the value of debt shrinks to £164,070.
With our current inflation rate of 10%, that means the value of the debt will fall dramatically, to just £77,109. Throw on top of that the historic rise in house prices, meaning more equity for landlords and interest rates still below current inflation levels, this means landlords can benefit highly from periods of high inflation.
Also consider the fact that rising interest rates curb demand for new houses, meaning a higher population will be seeing to rent means a competitive rental market, allowing landlords to up their prices.
Overall, to help curb inflation, and conserve the value of your money over time, you’re going to have to invest, especially during times of inflation. Where to put your money is the question:
Savings accounts are ideal for rainy-day saving and a good safety net, but your money’s value will diminish if you your saving’s interest rate is lower than the rate of inflation.
Stocks and shares can be a great way to grow your money but it’s highly volatile and susceptible to the highs and lows of the ever changing stock market. Companies can be wiped out entirely, especially during times of economic turmoil.
Property’s value can fluctuate but on the whole the value of property has only been going upwards. Afterall, everyone needs a home. And unlike the stock market, property is far less volatile and it can’t just disappear overnight.
Regardless of economic climates, the demand for rental and residential homes will continue to exceed supply. Investors can assure themselves that property will remain a strong and lucrative long-term investment.