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  1. #1

    Protection against interest rate rises

    With interest rates at an historic low for an unprecedented amount of time, the good times have been rolling in recent years for investors borrowing money.
    However, at some point they will obviously start to rise. This has led me to ask a number of questions of my current and future investments, i.e. my financial arrangements and minimum yields required to provide some security against future rises.
    Do you stress test your portfolio? If so, what rate do you use? Personally, I can't see standard BTL mortgage rates (not interest rates) going above 6% in the next 5 years.
    I also wonder if other investors apply certain 'rules' when assessing a deal with regard to yield, in order to protect against futures rises? I understand that lenders will generally not lend unless the rental payments cover at least 125% of the mortgage payments.
    I look forward to hearing your thoughts.

  2. #2
    I've just posted a comment on Nicks article re the upside of borrowing and didnt include the risks of interest ratre rises - your right Gary, you should stress test interest rate rises - I remeber base rates of 15% back in 1990's. Also if you're borrowing commercially look at the Facility Letter for an LTV covenant - if you breach it because of a value downturn the lender may well try and 'bend you over' to extract further costs.

    Also we have the expectation that Interest Costs are going to rise as we crawl out of the currecnt economic abyss - I'm working with a Corporate Borrower and am looking at borrowing costs of 7-8% (albeit fixed).

    Personally I can see BTL mortgage rates getting above 6% and would stress test at 10% but that is just my view

  3. #3
    For what it's worth I reckon BTL rates could rise above 6% and I'm currently stress testing to 8%. Beyond 5 years I think this may even be too conservative, but I take the view that better to be prepared than find myself sitting in a pile of the proverbial down the line

    Most rental agreements I've signed/ seen over the last couple years have annual increases linked to a multiple of the inflation rate and I thought about including this in yield calcs, but I've ignored rent increases in order to be prudent.

  4. #4
    Good call Graham, I've got a 10% void provision. Most lenders seem to be calculating 125% rent cover multiples using rates between 5 and 6% already. If there's anything we've learnt over the last couple years it's don't rely on the banks to look after you, so best assume something a little harsher!

  5. #5
    In the short-term, I stress test at 10% to ensure profitable cash flow at these rates with realistic occupancy.



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