Interest Rate Rises: Why Alternatives Are Becoming More Appealing To Landlords

With interest rate rises driving up the cost of buy-to-let mortgages, it’s little wonder that many investors are worried about the squeeze on their profits. It’s a situation that’s leading many to seek out alternative investment options that are not affected by interest rates increases or the impact of record inflation, both of which show little sign of slowing down any time soon.

In these turbulent times, one popular avenue for many seasoned investors is property portfolios, where investors simply own a share of a portfolio and become part of a larger consortium. There are some obvious benefits to this, including regular returns without many of the day-to-day hassles or rising costs associated with being a private landlord.

Crucially in these times of rising interest rates, investors benefit from the fact that there is no mortgage on this type of investment, meaning it is not affected by interest rate rises pushing up monthly repayments and potentially wiping out their returns, as is the situation currently being faced by buy-to-let landlords up and down the country.

The Impact of Interest Rate Increase

For years, buy-to-let investors have benefited from low interest rates and high rental yields - but the situation is changing.

With inflation reaching a 40 year high, the Bank of England has increased interest rates six times in a row. It is widely expected that the base rate will continue to increase in the coming months and years amid warnings inflation could reach 13% in October. This means that landlords will be paying more for their mortgages, which will reduce their profits from rental income.

Secondly, the government has been cutting mortgage interest relief. Landlords will now get a flat-rate tax credit based on 20% of their mortgage interest. They lose the privilege of deducting their mortgage interest payments from their taxable income. Previously, this gave them a 40% tax relief on their mortgage payments.

But it’s not just interest rates and mortgage repayments that are of concern to landlords.

The UK government has made several moves over the last few years that have hit private landlords, including the requirement for gas safety certificates and Energy Performance Certificates (EPC). There’s also the upcoming legislation designed to protect tenants and make sure that they are not being taken advantage of by unscrupulous landlords.

So, if buy-to-let is no longer viable for many, what’s the alternative?

Great Opportunities for Savvy Investors

You might think it’s all doom and gloom - but there are still plenty of opportunities out there for savvy investors.

One option is to look towards indirect property investments, where you can invest without making an actual property purchase or needing to take out a mortgage.

With investments like Avora Capital, instead of putting money into a property where you don’t know what the interest rate is going to be or whether you are going to face issues with tenants and payments further down the line, investors simply join a consortium of investors who each own a share of a property portfolio.

The benefit of this is that the investment is unencumbered, providing a simple turnkey solution that can deliver returns each and every month without any of the day-to-day hassles of being a private landlord.

Rather than putting down a deposit and having a mortgage when mortgage costs are currently so unstable, by investing in a group property portfolio there is no risk from interest rate increases. There is also no need to worry about common issues like rent arrears, tenants defaulting on payments, or ongoing maintenance and repairs.

What’s more, property portfolios allow you to take advantage of investing in property assets that may otherwise be unavailable to you. In the case of Avora Capital, we spend a lot of time investing in sectors that will deliver the best long-term asset growth and consistently high rental returns.

One of the biggest opportunities in the current climate is social housing. A severe shortage of properties has led local councils and housing associations to acquire large numbers of properties on 25-year index-linked leases, enabling them to increase their housing stock without major capital outlay.

For investors, they have the chance to generate ongoing returns from this sector while also helping to tackle the huge social housing shortfall in the UK.

This is just one example of the many opportunities that are out there. The golden age of buy-to-let might be over, but there is still money to be made for savvy investors with a solid strategy.

Important note: The information provided in this article is general in nature and does not constitute personal financial advice. If you are unsure whether an investment is right for you, please seek professional advice. If you choose to invest, the value of your investment can both rise and fall so you may get back less than you put in.