Interest rate increases: How does it impact you and why?
We asked Rob Starr Cert CII, Cert (MP), CEO of Seico Group for an expert viewpoint on the current interest rate increases and how they are currently impacting specific areas within the property sector.
The impact of interest rate increases and increased inflation clearly has a negative financial effect on everyone. But it’s fair to say that for those involved in the property market as a source of income the impact is far more than just financial, it also brings an element of uncertainty to our lives.
From a borrowing perspective, we always tend to concentrate on the standard residential market, as that of course is where the volume is. But there are another three areas where the impact is now really starting to bite – these are Property Developers and Construction Businesses and Later Life borrowers.
Property development finance
It is no surprise that developers are struggling at the moment as rates on refurbishment and development loans have hit 6-7%. Mezzanine finance has also almost disappeared.
In addition, in some areas, property prices have fallen, which means developers have less headroom on loans. Furthermore, site valuations are starting to come in lower, which also reduces viable loan amounts. It really feels like the Banks are concerned about a housing market slowdown. New players are definitely going to find it extremely difficult, too most experienced developers, with strong track records, have seen this all before and can secure the finance they need by taking expert advice.
Perhaps for these, it means that there are better deals to be done as the competition is less and the pendulum can start at last to swing in their favour.
Construction business finance
The UK economy is almost entirely reliant on property. Builders need to be able to build and require funding for materials, wages and equipment. However, because of rising inflation and interest rate volatility, lenders are wary of funding construction projects. This is once again an area where the more experienced and proven construction companies have the advantage over the newcomers, as they can demonstrate resilience in previous times and perhaps they can cash flow some of their costs more than new players can.
The alternative to construction finance is of course Bridging Loans. These always seem to be available no matter the market conditions, but they do take advantage of high rates being offered over standard lending and as such they are more expensive now than they have ever been and have much tighter terms. The same is true of Asset Finance deals for equipment, they too are still available by they also have higher rates and need larger deposits. It does seem that Lender’s appetite for new construction is very limited – and that means only the best projects are getting funded. In fact, most builders we speak to are having to self-fund or pause projects until the outlook improves. Survival is probably now the priority for construction firms rather than growth.
Later life lending
Later Life lending, usually known as equity release, is for older borrowers seeking retirement and needing to repay their interest-only mortgages to keep their home or to use some of their equity to create a better retirement. However, these types of loans have been hit really hard by the rate hikes and Lenders have pulled many products and increased their rates so dramatically for those over 55 that the numbers are now starting to not fit.
It has made it more difficult for older borrowers to release equity from their homes and the ones who can borrow are finding that the amounts are much lower than they need. Equity release may no longer be viable for some. There is no real solution to this at present, as high-interest rates have a dramatic effect when interest is rolled up into the capital over several years. For this to be viable it will mean borrowing less or else maybe having to move house.
Read more about banks’ lending policies and current trends on residential and buy-to-lets in the latest issue of our newsletter South East Property:Read South East Property