Ajay Ahuja on Margins, Borrowing and Rates

A well known investment bank has come out and said that they think base rates will end up being on average 2.5% over the next 10 years.

The reasoning for this is that banks are setting high margins over what they lend at.  So they are lending at +3.5% to base which means that the Bank of England cannot really raise rates beyond 2.5% as the nation’s effective borrowing rate will go over 6%.

So if you have borrowing which is set at say 1.75% over base then you can look at an average rate of 4.25% over the long term.  Now that is a fair rate!

Now inflation is kicking in we could have the following happening:

Rates being kept on hold at 0.5% so we can come out of recession

Inflation souring

Then simply everything will get more expensive.  Great!

The reason why I say great is because your debt just shrinks.  Over time wages go up, property prices go up, everything goes up EXCEPT your debt.  Lovely.

I have a £15m portfolio with around £7m debt.  The Loan To Value on the portfolio would be 46%.  If we experience 100% inflation over the next 5 years (wshful thinking I know!) then my portfolio would then look like:

£30m with £7m debt.  My loan to value would be now 23%.  Nice!  But now check this:

My rent would have grown by 100% as rent is a function ofwages which is a function of inflation!

So my rent of £60,000 per month would now be £120,000 per month WITH the same debt levels.  Now I might be paying the same mortgage payment if I were to get a 10 year fixed at 4.25% and then guess what:

I would be raking it in!

My profit would have increased and relatively speaking even though a pound today is worth only 50% of what a pound would be worth in 5 years assuming 100% inflation I would have more than doubled my profit.  100% inflation could multiply my profit by 6 or seven times.  So this would effectively triple my real profits.

So it will be interesting to see what really happens this year.  We can all speculate but it is much more fun getting involved.  Would you not agree?  Learn More

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