Good News
Many Buy to Let investors who have traditionally geared their investments heavily, sometimes at the 80% + LTV level, have been left have been out in the cold by lenders until now. Today 10th may 2010 has seen the return to market of Mortgages for Investors in The Buy to Let arena, at the 80% LTV level.
Many Buy to Let Landlords enter the market on fixed deals as this is a way of securing repayments from 2-10 years. After this period investors revert to the Lender’s Standard Variable Rate (SVR). The disadvantage of a SVR is that it need bare no relation to the Bank’s Base Rate (BBR); effectively you are at the mercy of Lender’s internal decision making.
While interest rates are low SVR‘s have remained relatively stable however adhoc interest rate rises are not uncommon. The latest lender to increase its SVR was Marsden Building Society, which increased its SVR by 0.46% to 5.95% on January 1st this year. According to Moneyfacts, 8 Lenders have increased their SVR while the Bank Base Rate remained at 0.5%.
A prudent Investor would try to fix their rates again as it buys security going forward. The downside of re-mortgaging is that it costs a plenty, costs which should happily and logically be viewed as the risk premium for security.
Post election warning bells are sounding, a hung parliament could be the literal hanging of many investors if they don’t build the security factor into their investment model.
For many Buy to Let Investors the 80% LTV level may not go far enough however, it’s arguably the best news some may get this year.
It's a Gift
Since then two periods have marked the high and low in the history of The Bank of England Interest rate. 1981 marked the all time high at 17% and 2009 the all time low at 0.5%. Both periods signify memorable recessionary eras and yet the interest rates couldn’t be more different.
In 1979, the incoming Conservative government inherited an economy with inflation of 27%. Also many industries were considered inefficient and trades unions were powerful. There had been a winter of discontent; I remember the power cuts, with many strikes taking place in the late 1970s. So it was that Margaret Thatcher used Monetary Policy to restrict spending. Interest rate reached an all time high; savers had never had it so good but, home owners with mortgages and businesses tied in to loans suffered by spiralling repayments. Sound familiar? The government argued at the time that the recession was necessary to shake up the economy and get rid of inefficient firms. It is true that some firms were inefficient but most economists would argue that the recession was deeper than it needed to be. With the rapid appreciation of sterling many good firms also went bankrupt.
Lessons learn’t from this period tell us that Monetary Policy is not a great way to control inflation.
Nowadays the Monetary Policy Committee (MPC) are charged with the task of regulating inflation to 2-3%. Their control of the interest rate to its all time low of 0.5% has been in part an attempt to do this but, its not working yet inflation is too low (1.5% Oct 09). In order for the plan to work the people, businesses and banks must be willing and able to work with and take advantage of the market rates. That’s the bones of the problem; a lack of confidence in the system. The all time low rate of 0.5% is simply not translating into accessible loans which is what’s needed to stimulate the economy.
The attempt in 1981 and 2009 to control the behaviour of providers and consumers by altering policy; interest rate or otherwise, fails to recognise that personal or corporate decision making is based on confidence in the system and application of risk preferences; What’s the point in a low interest rate if liquidity (or willingness to lend) is at an all time low,and media opinion of the future predicts such a range of outcomes.
Interest is only part of the story; a scarce supply of money due to ‘the credit crunch’ has effectively forced up the internal rate of lending and, many companies or homeowners who may have been in the position to borrow no longer have the equity base with which to secure funds.
The interest rate hike of 1981 told us to save, even though many lost jobs, houses, businesses and had nothing to save. The interest rate dive of 2009 tells us to spend and borrow even though many are loosing jobs, houses and businesses & the banks are reluctant to lend at rates that reflect the true rate.
Sounds like different method same outcome.
The evidence that there is confusion in Government, the media and amongst economists is evidenced by Mervyn King who calmly advises that consumers should prepare for an eventual rise in rates. In other words even if you are one of the fortunate who happens to be sitting on a favourable interest rate, don’t get too comfy!
Helen Clover- Edinburgh, UK
