Hello folks, I’ve got Harminder holding the camera for me here.
It’s Dr Ro, sorry about the sound, we are on site at the moment.
As you’ve probably heard, there is an interest rate announcement coming in from the Bank of England. Basically with what’s happening with coronavirus at the moment, they are concerned about the public panicking, possibly people losing jobs, income freezes, companies struggling.
If you think about it from the Bank of England’s perspective, interest rates are typically lowered when there’s a general mass feel of something.
Classic examples are Brexit type events, an economic meltdown, a recession, in this situation – coronavirus which of course is impacting businesses. We are seeing airline companies struggling, and the events industry struggling. People running hotels suddenly have a depletion of clients coming through. In the travel industry, companies operate on the basis that they pretty much have borrowed money to keep the business afloat.
So if you’re a company and you’ve borrowed this much and you’re paying interest on that every single month, and your cash flow is impacted by those interest rates, lowering the interest rate means that your outgoing costs come down. If your costs come down it gives you the opportunity to last longer in business, as opposed to some of the big companies that are so highly leveraged, one, two- or three-months lack in business or reduction in business they’re screwed.
Same thing happens to property investors as well.
If you’re watching this and you’re running a business right now, and you’ve borrowed money to keep your business afloat, that lowering interest rate may be beneficial to you. But here’s the challenge: if you’re sitting here and you’re watching this as a property investor, my feeling is that’s what the Bank of England is trying to do.
What we don’t know is what type of mortgages people have and when you will actually get a change in interest rate. Sometimes there is a lag between when the interest rate comes down and when it’s passed onto the end client.
The hope is that it will be because there’s a massive part of the population that’s struggling right now, a little bit nervous, possibly their salary has gone down. They’re losing their jobs; the whole idea is the cost of that borrowing is cheaper for the mass population. It enables them to survive longer in a time of crisis.
I don’t actually think this is the only crisis we are facing. If it comes down to 0.25 and the intention is to bring it back up again, I have another view on this and if you’ve been watching the previous webinar I ran you may know that I talked about the fact that in times of crisis, what the banks will often do in preparation is bring the interest rates up.
We previously had our interest rates at 0.25 to 0.5, to 0.75 and if you’ve been to the seminars I’ve been running over the last year, I said it might go up to 1% in preparation for when there’s another recession.Then they typically will bring it back down again.
We’ve had a drop because of coronavirus. Let’s say that scare goes away and the banks say that’s okay, everything is good again and they start to bring it up a couple of clicks to 0.75 again, and then bang we are hit with the next recession. The next recession is due because the last one was in 2008 and here we are in 2020. The whole thing has been delayed.
There is a very good chance it might come back up and go back down again, which if you think about what’s happening with fixed rate mortgages at the moment, they’re extremely low and they’re doing five, 10 year fixed-rate mortgages at a low percent.
My gut feeling is we are going to see it stay low for a while. How does it benefit you at the moment? I actually don’t know. If you’re watching this and you own a business and you’ve got a loan out, again seek professional advice from an independent financial adviser.
But a good strategy, and I’m going to do this myself today, is to go find out from the banks whether you can get a variable-rate interest on your mortgage and loans. I’m going to call the bank and ask them if this change in interest rate is actually going to have an impact on the loan I have with them.
I don’t know if the bank is going to go, “No actually, it’s an emergency rate so it doesn’t impact the loan I have with you” or “yes, the Bank of England has done this and we want to pass this on to you to help you out.”
My hope is the banks will say I want to help you out. So that’s a good strategy to do right now. Call your lenders, call your loan companies you borrow money from. Find out if the interest rate is going to be passed on to you or actually, it’s not going to impact you.
I can’t see why they wouldn’t do that bearing in mind the Bank of England have done this as a precautionary measure, as a safety measure to keep people calm at this stage.
Look out over the coming days – I’ll give you some further commentary if we get any more news, or if I get any correspondence from one of my lenders telling me Dr Ro interest rates have been dropped.
Dr Ro signing out.