Episode Details

Alastair prompted this week's podcast topic, and it's a very important one! 

But what's been happening with The Robs this week? Rob D is putting the finishing touches to his new book which will be out on April 26th, we're all excited about this one as it is definitely needed.

The Robs will also be at the Meetups tonight - Rob B is stand in leader in King's Cross, but Rob D has travelled to Scotland to our rebooted Edinburgh Meetup. It's not too late to get your ticket to your local Meetup, and remember, there's zero selling, just good honest property chat over a few drinks.

Now on to this week's big topic - interest rates!

A brief history of interest rates

• Long term average interest rates are around 5%
• In 1990 they peaked at 15%
• For the rest of the 1990s they were roughly between 6% and 7%
• In the early 2000s they were mostly between 4% and 5.5%
• In April 2009 they fell to 0.5% and stayed there until a further cut to 0.25% last year

Why are rates so low?

• To promote consumer demand. You’re more likely to spend money if you get little return on saving it
• To boost asset prices, which increases willingness to spend
• To make it cheaper for companies to invest in growing
• If we’re being cynical, to make it cheaper for the government to service its own debts!

How people misunderstand interest rates

• An increase in your mortgage from 2% to 3% doesn’t sound like much, but it’s a 50% increase
  • If you borrow £200k at 2%, your monthly interest payment is £334
  • When it increases to 3%, the payment goes up to £500
• This is what Alastair was referring to. It’s easy to make investments work when the finance is so cheap. But when it’s not so cheap, it’ll be much harder for investments to stack up
• The PRA rules will help for new investments because they get stress tested at 5.5% anyway
• Investors who’ve been on trackers since pre-crash and Owner-occupiers could find themselves in big trouble

What happens if rates go back to double-digits?

• Unlikely because rates are set by BOE now
• Also, rates tend to rise to combat inflation. Inflation is the result of more demand than supply (roughly speaking), and we seem to be moving into an era of low demand demographically
• There’s been huge asset price inflation as a result of QE and low rates (hence demand for assets), but this hasn’t filtered down into the real world and seems unlikely to do so
• So there seems little prospect of rates getting really high. But they will go up from where they are now…

 So how worried should we prepare for rates rising?

• Rises will be mitigated by banks lending at more competitive rates. With rates as low as they are now, they’re making more margin than they used to
• Stress-test up to at least 5% – you have to if you’re borrowing anyway
• If you’re sitting on properties that only cashflow because you’re on a very low rate, make plans to deal with that before rat