Rising Interest Rates? Cost of borrowing IS NOT the big problem!
The big problem with rising interest rates is NOT the cost of finance.
The media may focus on cost, but that is not the big risk. The risk to borrowers is the affordability of borrowing.
When fixed rates expire a new rate replaces it. Rising interest rates means the cost is higher, meaning affordability is tighter and your income may NOT be enough.
What do you do about it? There are good things you can do, this video shows what to do to protect yourself.
#mortgages #business #businessnews #interestrates #lending #borrowing #smallbusiness #property #realestate
Chapters:
00:20 - It's All About The Cost
01:28 - Has Your Income Doubled?
02:21 - What to do NOW
03:15 - Why you need to act now
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https://www.limeconsultancy.net/conta...
Narrative
The biggest problem with rising interest rates is not that it increases the cost of your finance. Interesting. The biggest issue with rising interest rates is not that it will increase the cost of your finance. It's the fact that it changes your affordability calculation that lenders use. Why is this an issue? If you've got a commercial mixed use or a commercial property, and you've got a loan against that property, when you took out the loan, the lender would have wanted the income from that property to exceed the loan interest cost by certain percentage, if you were to borrow it as a limited company, typically the income on the property would need to be 125 -130% of the loan interest cost. Add into that, the majority of that type of lending is done on a fixed rate, typically a five year fixed rate.
If
the interest rate that you've got at the moment is say 3%. And when it comes to renew that interest rate, that interest rate goes up to 6%. That's a 100% increase. You've doubled your interest cost. The question is, have you also doubled the income from a property? The chances are you haven't and therein lies the issue.
If
you've got a fixed rate and it's due to expire in the next couple of years, the chances are your next fix rate is going be at least a few percentage points higher. If you then got a loan on your property, and that loan is 70, 75, 80% of property value, the chances are that the affordability was already pushed to the max when you took it. This means when you come to renew, the loan cost is going be higher and the chances are that the property income won't have risen by the same multiple. The big question is what do you do about it? When it comes to finance there's a very simple way of looking at things, and that is that time equals options. The more time you give yourself the more options you have, and that's especially true here. If you've got a fixed rate and it's due to expire any time in the next 12 to 36 months, the chances are when it expires your next fix rate is going to be higher. The reason for that, if you look at the Bank of England reports, they say that interest rates are going to continue to rise over the next 18 months, they're then going to plateau off before they start to come down.
It's a prediction. Don't hold me to it. But if we work on that basis, when your fixed rate expires, you're going to be paying more. So what do you do? The chances are the best thing to do is look at it early because early equals options, it may be better to break your fixed rate, to take a longer fixed rate, secure now, and be in a position that when it expires next time, it's at the point when interest rates are projected to come down slightly. My advice, look at your options now. Don't leave it until your fixed rate expires, and then look at what your options are. There's a risk the income from your property will make your current loan unaffordable, and you've got a problem. Don't be there. Look at it early. If you've got a fixed rate expiring anytime in the next two to three years, look at it. Look at the figures, look at what it's going to cost and work out what's better for you. The biggest issue with interest rates rising isn't the cost of finance it is your affordability. Any questions? Get in touch. We can guide you through it. Follow us on social media.