Use financial profiling to understand the impact of inflation on your property portfolio
Hardly a day goes by without new inflation statistics appearing in the mainstream media.
The current inflation rate – at the time of writing – is 9% – a 40 year high, but is expected to rise further due to the Russian-Ukrainian war and other issues closer to home , such as supply chain disruptions and the aftermath of the covid19 pandemic. There’s literally no escaping inflation – people feel it in their shopping carts, the cost of fuel, and their energy bills. It is increasing at a pace and the forecast is grim.
What does inflation have to do with homeowners?
A lot actually and, surprisingly, it’s not that bad at all!
Inflation could be described as a kind of fuel for the economy and healthy levels between 2 and 4% actually mean that the economy is operating at peak productivity and efficiency, but if inflation exceeds this level, the economy begins to be negatively impacted.
The obvious negative impact for owners is that the Bank of England is using the base rate to control inflation, and they have started raising the base rate. This means that homeowners with standard variable rate mortgages will find that their monthly payment begins to increase and the only way will be for the foreseeable future.
Due to the low ultra-long-term interest rates we’ve enjoyed over the past decade, some homeowners may have been lulled into a false sense of security, but it’s not going to last and they’ll have to take action. to protect their portfolio against the extremely inflationary environment we are now entering.
This means thinking about re-mortgaging to a fixed rate mortgage to protect your margins. There are currently attractive 5 and 7 year fixed rates available, but if you are particularly risk averse you may want to consider a 10 year fixed rate – a decade to know exactly how much your monthly mortgage payment is.
The next inflation risk for landlords is renter affordability. Renters are facing a rising cost of living, and they may start to struggle to pay rent as the cost of living rises…and rises.
Landlords who offer “bill-inclusive” rents, such as HMOs, student rentals and vacation rentals, will see their margins shrink as their energy bills rise. Although your costs will increase, you are unlikely to be able to pass them on to your tenants in the form of increased rent, for the reasons discussed above, so your margins could start to erode.
All owners with an “incl. bills” policy would be advised to undertake energy-saving adaptations to their property, one of the simplest being to install a smart thermostat or upgrade to a boiler class. A. The older your boiler gets, the less reliable and efficient it becomes and upgrading to an A rated boiler could improve your property’s EPC rating, save on energy bills and make it more attractive to tenants. We are already hearing that energy efficiency is becoming more and more important to them.
You can also use resources from the Energy Saving Trust website to educate your tenants about energy efficiency. For landlords who don’t include bills, this could help your tenant reduce their energy costs, allowing them to pay their rent.
As inflation bites, people will be less inclined to spend money, which will begin to negatively impact the economy on many levels, including the real estate market.
So…rising mortgage costs, stable rents and rising rent arrears are all hallmarks of an inflationary environment that will make life even harder for landlords for the foreseeable future.
So what’s the good news?
A basic rule of inflation is that it lowers the value of a currency over time. In other words, money now is worth more than money in the future. Thus, inflation allows debtors to repay lenders with money that is worth less than when they originally borrowed it.
In an inflationary environment, consumer confidence can be low, which means people are hedging their wallets and not making big financial decisions. This often leads to an increase in rental demand, which is always an important metric for landlords.
As savings are eroded by inflation, this may induce people with large savings reserves to invest in real estate as a store of value, which in turn helps house prices rise. stay strong.
Assets that do well during inflation are those that are guaranteed to fetch more cash or increase in value as inflation rises. A BTL property is a good example.
As a rule of thumb, if you own assets during a period of inflation and can afford to maintain them, you should be fine.
During this period of inflation, it is imperative that you understand the performance of your real estate portfolio and identify possible weaknesses, such as SVR mortgages, as well as assess the return potential of your portfolio over the years. under different scenarios of rising inflation.
Technology can help you stay on track and ensure you are prepared for any future scenario.
Use Lendlord software for detailed analysis.
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