In our first article we looked at what happens to mortgage rates when interest rates start to rise, in this second article we look at the impact of rising interest rates on your personal circumstances:-
If you want to sell your property
Ideally if you are in one of the overheating boroughs in London or in an area where property prices are now rising, now is a good time sell. The number of properties on the market is low versus demand, so you could get the ideal scenario where two or more buyers compete for you property – and that’s typically when you get the best price.
If you need to sell and property prices have now stopped falling - it appears prices tend to grow best in the first year or so of the market ‘turning’ so towards the end of this year or early next may well be a good time to sell your property.
Speak to your local agents, they will know who’s looking to buy and what your likely market is.
If you wait until interest rates start to rise from 2015 and through 2016, then demand may wane and property price growth go into reverse, remain stable or they still grow, but at a lower level as demand equals supply.
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From a buyers perspective, a rise in interest rates is a blessing on one hand and a problem on the other. Currently low interest rates means access to low mortgage rates.
Nationwide are currently reporting at existing mortgage rates, for first time buyers, this means mortgage payments are at one of their lowest levels – costing on average just 19% of income.
So the downside of higher interest rates, if it leads to 5% or more mortgage rates, then your mortgage payments will go up every month.
So what’s the upside? Well, if interest rates rise and you can afford to pay the higher rates, others will find it increasingly difficult, so it’s likely demand will fall back, causing a better match for supply and demand. In this case, property prices will either remain stable or only grow at reasonable levels, ie under 5% per year.
If you are hoping to make money from property in 2014, it may be one of the worst times to invest! It doesn’t mean it’s impossible, but you don’t want to buy in a market where there are more buyers than sellers. This typically over inflates house prices, restricting future profit growth.
However, as a novice investor if you are looking at capital growth from a long hold – such as 15-20 years, it’s not so bad as you are more assured of higher prices, just be cautious.
If it’s income you are after, then 2014 may not be the best year to buy unless you can afford to purchase a property that’s tough to lend on, so above a shop or requiring substantial renovation (new electrics, roof etc). In these cases you can force capital growth or still secure good income returns, even if capital growth may not be too hot moving forward.
For investors who bought and are only just covering income through rents at 3-4% mortgage rates, check whether you can still cashflow your property at 5-7% mortgage rates. If you can’t – you may be better off selling and re-investing in something you can make cash flow positive and/or secure capital growth from.
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You may think that mortgage rates won’t affect you – but they may. If your landlord owns your property outright or they have a small mortgage up to 60% of the value of the property, then a rise in interest or mortgage rates won’t affect you that much.
It will be good from a perspective if you are trying to save for a deposit for a home, as rising interest rates are good news for savers. However, if your landlord has over stretched themselves and can’t cover the mortgage when rates go up – they may be forced to sell or put up the rent.
So, it is important to know how financially secure your landlord is. You can check whether they own the property outright or have a mortgage by using the Land Registry Property Ownership
With regards to renovation projects, a rise in interest rates is likely to put up the cost of any loan you may take out, but if you are using cash you have saved, it won’t make much difference.
Bear in mind a rise in interest rates is likely to hit sellers trying to maximising their price, so be aware you should only spend what your property can afford from an improvement perspective.
Spending £30,000 on a kitchen for a property worth £150,000 isn’t going to mean your property is now worth £180,000. If you put in a £15,000 swimming pool and the property is worth just £300,000 it may actually reduce it’s value – and make it tougher to sell.
So, before you make any improvements to your existing home, make sure you know whether they will deliver additional value – and if not, only do it if you know you can stay for many years to come.
For people looking to buy a property to renovate, 2014 will be a tough year to find a good value project. So don’t aim to ‘buy this year’ aim to ‘buy at the right price’. Increases in interest rates will hopefully slow the market down and mean there are plenty of opportunities for your to buy rather than the few available at the moment.
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