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Buy-to-let – Use cash to safeguard against rise in interest rates

Buy-to-let – Use cash to safeguard against rise in interest rates

As Bank of England releases biannual Financial Stability Report, investors should consider using cash over borrowing to fund purchases.

Summary:

  • The Bank of England has released its latest Financial Stability report, as the UK’s interest rates are on the verge of increasing for the first time since 2007
  • Using cash to fund property investments is the only definitive way of protecting against rising rates
  • Student property is largely unaffected by interest rates

Buy-to-let investors should consider using cash to fund investments and safeguard against rising interest rates.

Today the Bank of England has released its biannual Financial Stability report and has highlighted the UK’s buy-to-let lending as an area of possible concern, as British interest rates are on the verge of increasing for the first time since July 2007.

It’s becoming much easier for people looking to borrow money to find credit, and the Bank believes that this is may be a risk to both investors and the economy should rates increase. The latest figures show that buy-to-let investors that have borrowed money account for 15% of outstanding loans and 18% of the flow of new mortgages.

“This could be a particular concern in a rising interest rate environment, if properties become unprofitable given higher debt-servicing costs,” the Bank said. “Buy-to-let borrowers are potentially more vulnerable to rising interest rates because loans are more likely to be interest-only and extended on floating-rate terms, and affordability tends to be tested at lower stressed interest rates than owner-occupied lending.”

Although any rise in interest rates is likely to be marginal, and still vastly less than pre-financial crisis levels, using cash to purchase a buy-to-let property rather than taking out a mortgage is the only sure-fire way investors can protect themselves against any rise in rates.

Furthermore UK student property, one of the most popular cash-only purchases, is completely resistant to external economic factors, and is the only property type where returns increase throughout each year of the recession.

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