14:18 PM, 30th May 2022, About 2 months ago
Barely a day goes by without some new statistic about inflation being plastered across the mainstream media.
The current rate of inflation – at the time of writing – is 9% – a 40 year high, but this is set to increase further due to the Russian/Ukraine war and other issues closer to home like supply chain disruptions and the aftermath of the Covid19 pandemic. There is literally no getting away from inflation – people are feeling it in their shopping baskets, the cost of fuel, and their energy bills. It’s rising at a pace and the forecasts are grim.
What has inflation got to do with landlords?
Quite a lot actually and, surprisingly, it’s not all bad!
Inflation could be described as a kind of fuel for the economy and healthy levels of between 2 and 4% actually mean that the economy is operating at maximum productiveness and efficiency, but if inflation rises above that, then the economy starts to be negatively impacted.
The obvious negative impact for landlords is that the Bank of England uses the base rate to control inflation, and they have started to raise the base rate. This means that landlords with mortgages on a standard variable rate will find that their monthly payment starts to increase and the only way is going to be up for the foreseeable future.
Due to the very long term low interest rates we have enjoyed over the past decade, some landlords may have been lulled into a false sense of security, but that is not going to last and they will need to take action to protect their portfolio against the hugely inflationary environment we are now entering.
This means thinking about re-mortgaging to a fixed rate mortgage to protect your margins. There are some attractive 5 and 7 year fixed rates around at the moment, but if you are particularly risk-averse, then you could consider a 10 year fixed rate – a decade of knowing exactly how much your monthly mortgage payment is.
The next inflation risk to landlords is tenant affordability. Tenants are facing increased living costs, and they may start to struggle to afford the rent as the cost of living rises … and rises.
Those landlords that offer “bills included” rents, like HMOs, student lets, and holiday lets, will find their margins slim as their energy bills increase. Although your costs are increasing, it is unlikely you can pass those on to your tenants in the form of increased rent, for the reasons given above, so your margins could start to be eroded.
Any landlords with a “bills inclusive” policy would be advised to undertake some energy-saving adaptions to their property, one of the simplest being to fit a smart thermostat or upgrade to an A-rated boiler. The older your boiler gets, the less reliable and efficient it will become and up-grading to an A-rated boiler could improve your property’s EPC rating, saving on energy bills, and making it more attractive to tenants. We’re already hearing that energy efficiency is becoming increasingly important to them.
You could also use resources on the Energy Saving Trust website to educate your tenants on how to be energy efficient. For landlords who are not including bills, this could help your tenant keep their energy costs down, enabling them to be able to afford their rent.
As inflation bites, people will be less inclined to spend money, and then this starts to negatively impact the economy on a number of levels, including the property market.
So … rising mortgage costs, rents static and increased rental arrears are all hallmarks of an inflationary environment that is going to make landlord life even more challenging for the foreseeable future.
So what is the good news?
A basic rule of inflation is that it causes the value of a currency to decline over time. In other words, cash now is worth more than cash in the future. Thus, inflation lets debtors pay lenders back with money worth less than it was when they originally borrowed it.
In an inflationary environment, consumer confidence may be low, meaning that people are protecting their wallets and not making big financial decisions. This often leads to increased rental demand, which is always an important metric for landlords.
As savings are eroded by inflation, this can prompt people with large savings pots to invest in property as a store of value, which in turn helps property prices remain robust.
The assets that do well during inflation are those assured of bringing in more cash or rising in value as inflation increases. A BTL property is a good example of that.
As a general rule, if you own assets during an inflationary period, and you can afford the up-keep of those assets, then you should fare well.
During this inflationary period, it is imperative you understand the performance of your property portfolio and identify any weaknesses, such as SVR mortgages as well as evaluate your portfolio’s potential return over the years based on different scenarios of increase in inflation.
Technology can help you be on track and make sure you are ready for any future scenario.
Use the Lendlord software for detailed analysis.
In addition to web-based desktop dashboard, Lendlord can be accessed using iOS or Android mobile apps.
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