DISCLAIMER: This is not advice. This is information only.
To really understand interest rates, I would say that you need to have a decent amount of financial literacy. And if you understand interest rates, it will help you with all of your finances. Like investing your savings into a rental property.
You will understand the dangers of leaving your hard-earned money in a less than 1% savings account. With 20 years’ experience investing in property, I know 10% ROI (Return On Investment) is very achievable and this is much better than less than 1%.
Being self-educated and financially literate, will help you to choose the best mortgage product most suitable for your situation. Like interest only or repayment? Or choosing between fixed or variable? If you’re a beginner I would speak to a FA (Financial Advisor) who will help you to find a suitable mortgage product.
Before you nod off, this is important stuff and will help you out and hopefully nudge you towards fully understanding interest rates. Plus, if you read on, I’m going to tell you exactly how I insulate my properties from rising interest rates.
Background info on inflation and rising interest rates
QE (Quantitative Easing) is worth getting you head around. It’s basically how corrupt, incompetent governments and central banks manipulate fiat currencies around the world.
QE leads to inflation, and this leads to pain for the majority of people around the world. But do the so-called elite (top 1% economically) care? I very much doubt it! Inflation doesn’t put them on the bread line because they are closer to the money, and they buy assets with the extra cash before inflation rates kick in.
I admit I benefit from inflation because I have managed to accumulate assets over the years. But I’m not manipulating money causing inflation and hyperinflation. Not to mention the fact that inequality is increasing. Personally, I’m just a council kid trying to become financially independent.
Inflation is bad news and I’ve been writing and talking about it A LOT since September 2021. I’ve been aware of it for the last few years. Like inflation is at about 2% so factor it into my investment returns sort of understanding. But over the last few months I’ve really started to understand it and I encourage you to do the same.
This awful thing called inflation erodes our money and weakens our spending power. Currently inflation in the UK is just under 10%. The actual inflation is more likely to be between 15 and 20%.
If you have £10k in a high street bank and its giving you an annual interest rate of 1%, you money is going to erode in value year after year. If inflation is 10%, then this means the value of your money has reduced by 9%. By increasing the supply of money by billions and trillions, governments have reduced the value of that money. This comes down to supply and demand.
QE has been going on for decades and is an easy option for governments. Especially governments like the US, who’ve had expensive wars to pay for.
Richard Nixon removed the gold standard in 1971. This was because the dollar was pegged to the global supply of gold and this was like a ball and chain for the US government. The reason is that they couldn’t just print money when they wanted. Or they weren’t supposed to… this isn’t a history lesson honestly just a bit of info on inflation.
QE has kicked on again since the financial crisis of 2008 and has got worse since COVID in 2022. Look into the history of money and it will help you understand much of what’s going on today with inflation and hyperinflation. It’s very important because it effects all of our outgoings and really puts the squeeze on families already struggling.
And if you have properties or thinking about buying a property, it’s worth having some knowledge on inflation and interest rates. Then you can choose you mortgage product accordingly.
Rising inflation normally leads to rising interest rates
What if these interest rates went back to the early 90s. In 1992, the interest rates were at about 10%. This was back in the day when John Major was prime minsister. I was 9 at the time and didn’t have a clue what was going on with mortgages. But as far as I know, a lot of people in the UK struggled during this period.
What if you have a rental property and it’s on a variable rate. Imagine your mortgage payments if the interest rate jumped to 10%. The current Bank of England base rate is 1% … at the time of this video. Mortgage products are linked to the Bank of England base rate. Do I think the interest rates will rise to 10% or even more? NO. This would cause chaos and would be terrible for the UK economy.
I think they might rise maybe 2 or 3%. Add that to the cost of everything else going up and it’s just another dose of bad news.
What I do with my properties
I like interest only as it gives me the benefit of cashflow. But I’m also aware that the mortgages need paying off at some point.
With my small portfolio, I have half on interest only and half on repayment for some diversity. I’m benefiting from cashflow and some of the mortgages are getting paid off. If I want, I can also use the cashflow to pay some money off the interest only mortgages down.
Whether you are interest only or repayment isn’t that much of a big deal in my opinion. There are arguments for and against both.
THE IMPORTANT THING IS THAT THERE ALL ON FIXED TERM DEALS. .
When I arrange my products with my FA, I look to get 5-year fixed deals to insulate me against potential interest rate rises. All the properties within my portfolio and my home, are all on fixed deals. This means that if interest rates shoot up, I’ll be insulated because my repayments remain the same.
As a landlord I try my best to be a landlord that looks after the interests of his tenants. If my mortgage repayments stay the same, the rent stays the same. One of my tenants moved in back in 2007, and his rent is still the same.
If you have properties on variable mortgage products, it might be worth considering getting them on fixed deals.
VERY VERY important to educate yourself so you know all about inflation and interest rates so you can insulate yourself in a way that suits you. Remember this is just my opinion.
This content is put out to help other investors. If you’ve found value, pass it on to someone else who might benefit. You might have a friend who’s buying his or her 1st house and hasn’t really been given any information about property investing. Anyway, hope this has in some way helped. And if you want more info like this, you can read my 2nd book – THE DORMANT LANDLORD.