The Buy-to-Let (BTL) market in the UK is one of the most appealing property investment avenues for aspiring and experienced investors.
Buy-to-Let; the description is in the name but a short explanation will do no harm. The main purpose of a BTL investment is to secure a rental income on a residential property. In addition to rental income there is the possibility of capital gains either through a rise in market prices or by adding value to the property through renovation or extension.
The U.K is one of the most expensive places for rental accommodation in Europe, driven largely by the chronic under supply of housing. Basic economic theory is that when demand exceeds supply prices rise. While this is bad news for those who rent it increases the appeal of BTL opportunities to investors.
At present the BTL market has been boosted by recent pension reforms which have allowed individuals early access to their pension pots. Additionally, a steady rise in prices is creating more certainty in the current market and more investment activity is taking place.
There are the lucky few out there who can buy their investments outright then sit back and enjoy their rental incomes. However, a very large proportion of BTL investments are funded through mortgages. So there are some economic factors to consider when building or re-balancing your BTL property portfolio.
Mark Carney, the Governor of the Bank of England stated;
The judgement on whether interest rates goes up will be made around the start of 2016. If rates increase they will rise gradually over the next 3 years, reaching 2-2.5%.
These decisions are made by the banks monetary policy committee, which take into account a range of economic indicators and trends, including inflation. The Bank of England uses the base (interest) rate to control inflation. The theory being that higher interest rates encourage saving and reduce consumer spending. Less spending equals more pricing competition i.e. deflation.
Currently inflation is at 0%, but predicated to rise to 2% in 2016. If inflation rises too high or too fast, a larger rise in the interest rates may be used to counter it.
How does this relate to your BTL?
Mortgage products are reactionary, meaning that once the base interest rate changes the highly attractive current mortgages rates will change too. If you have buy to let mortgages whether interest only or amortising (paying down the principle (loan) and interest) it is worth thinking about remortgaging at a fixed rate while the economy is in our favour.
With rises in the interest rate and inflation predicted for 2016 the window of opportunity to get the best mortgage rates is closing. Now is the time to seriously consider moving onto a fixed rate mortgage.
Daniel Nelson, MSci
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