money4dentists’ Richard T Lishman is coming to terms with the new base rate
The Bank of England’s decision to increase the base rate from 0.25% to 0.5%, the first rate rise in over a decade, has been a long time coming. Now that it’s finally here, you’ll need to consider the impact this may have on you professionally and personally, and what can be done to mitigate any unwanted effects.
For the time being, the overall impact will be nominal compared to the effects of the base rate before the financial crisis of 2007 to 2008, but stay mindful that further increases could be on the cards in the near future. To what extent the recent hike is likely to affect you ultimately depends on your financial circumstances, but here are the main areas in which you could either benefit or indeed, feel the pinch.
Buying a dental practice
If your long-term goal is to become a practice owner, there’s no need to be put off by the interest rate rise, as the market is unlikely to be affected in terms of goodwill and sale price. What it will affect, however, is the interest repayments on any future loan from a lending bank. With the rate as it is now, a £500,000 ten-year practice loan could cost you an additional £10,550 over the complete term and £1,055 annually. As the base rate increases over time, so will your repayments, so be sure to factor in these costs in your financial forecast when calculating your affordability. Because by the time you’ve paid the bank and overheads for the practice, your take home wage could work out less than your earnings as an associate.
When applying for a loan most lenders will carry out a ‘stress test’ to establish whether or not you would realistically be able to repay the loan on a basic income. With a base rate of 0.5% this could make lending tighter, but only with time will we know the full extent of the impact on the dental practice acquisitions market.
Impact on independent practices
Existing practices could also be affected by the rate rise, because if patients’ outgoings increase due to a rise in mortgage, loan or debt repayments, they may be less inclined to pay out for treatments that are classed as non-emergency. So if you own a practice, be aware that if your patients are feeling the pinch, you might too.
For existing homeowners the impact of the rate rise will rest on the mortgage type. Tracker mortgages will incur the biggest increase to payments as they are directly determined by the base rate. For example, if you were paying 2% interest on a 25-year £250,000 repayment, your monthly instalment would rise by £30. In the present circumstances this shouldn’t have too much impact on your overall finances, but if the rate were to eventually return to what it was before the financial crisis, you may well find yourself in a situation where you have to find hundreds, rather than tens of pounds. If you are one of the 57% on a fixed-rate mortgage, however, you won’t need to worry just yet, just be aware of the implications when remortgaging.
First time buyers
If you are yet to step on the property ladder, there may be a few issues surrounding affordability if existing best-buy deals are replaced by high price ones. Where fixed-rate deals are concerned, the ‘revert to’ rate that activates at the end of the two-year term is likely to rise across the board, so it is wise to go in with an open mind and hope that cheaper loans are available when the opportunity arises to remortgage.
Do you have savings? If so, the outcome of the rise will be a lot rosier. For over a decade the returns on savings vehicles have been relatively meagre, but an increase to the base rate should improve this. For instance, if you have £10,000 in your Individual Savings Account (ISA) you are likely to see your return rise from £30 per annum to £55. Naturally, the more you make use of the available £20,000 Annual Allowance the better your return, but if you have other assets be sure to seek expert advice on the best way to manage your investment portfolio. As for your pension pot, the new interest rate is likely to simultaneously ignite a recovery in annuity rates and reduce deficits in company pension schemes, so either way you should be better off.
Altogether, the interest rate rise shouldn't cause too much bother for now. But if you’d like to find out more about how it might affect you, or if you need some financial advice, contact the independent financial advisers at money4dentists.
Richard T Lishman is the MD of money4dentists