Inflation is on the way back

The Consumer Price Index has risen 0.6% from June to July (and is now over double the Bank of England's official target of 2%) and the Retail Price Index (excluding mortgage interest bills) has increased by 0.4% to reach 5% (which is 2.5% above its old 2.5% target).

The main factors for inflation are coming from abroad in the form of rising fuel and food prices. Food prices are up a record 13.7% on the year.

Is inflation good news for landlords?

Most economists believe that inflation is bad for the economy. The lack of stable prices makes economic decisions by businesses and consumers difficult, if not impossible.

Landlords suffer from rising costs and prices, like any other consumer. In the past few years' landlords have suffered from massive labour price inflation, as skill shortages have increased the costs of using tradesmen, such as plumbers, builders and decorators.

Plus there have been other cost increases, such as accountancy and buy-to-let insurance rates, which continue to climb.

But the main advantage of inflation for landlords is that many have used a buy-to-let mortgage to secure their property investment and inflation can reduce the value of their buy-to-let loans.

Let's find out how inflation can reduce a buy-to-let mortgage.

Inflation and buy-to-let loans

If a landlord takes out an interest only buy-to-let mortgage of £100,000 over  a period of 20 years in a zero inflation economy (e.g. in Japan), then in 20 years' time that buy-to-let loan would still have a real value of £100,000. 

But if inflation runs at the current Bank of England's target rate of 2%, in 20 years' time, the actual real value of the buy-to-let mortgage will have reduced to £67,297.

If, as it is now, inflation is running at double the Bank of England's target rate at a long-term average of 4%, for example, then the real value of the buy-to-let mortgage falls to less than half its original real value to £45,639.

A great time to be a landlord

So with house prices falling and labour and insurance costs rising, those not in the know may feel that it's a bad time to be in the buy-to-let market. But this isn't true. Professional landlords know that it's a great time to buy and this is why:

1. They can pick up buy-to-let properties at bargain prices.
   
   
2. Rents are increasing rapidly.
   
   
3. Borrowing costs are dropping. The Bank of England has cut interest rates three times this year and is doing its best to keep them as low as possible.
   
   
4. Inflation is shrinking the real value of landlords' buy-to-let loans.

So landlords are finding that in the present market borrowing is cheap and their debt balance is devalued due to inflation running above the Bank of England's targets. What a win-win scenario for buy-to-let landlords all round!

Find out how buy-to-let landlords can make a profit from the credit crunch

Find out why you can still make money from buy-to-let in a recession

More information
Landlords: Download Tenancy Agreements now here
Make tenancy agreements easily, and save money, with Lawpack's 'Residential Lettings Kit'
Landlords expecting strong year in buy-to-let sector
Buy-to-let landlords: How to pick up a bargain property investment at auction
Top ten tips to profitable property
Find out how you can make profit from buy-to-let, even in an uncertain climate, with Lawpack's book 'Buy-to-Let Bible'
Learn all about your legal responsibilities as a landlord with Lawpack's guide 'The Complete Guide to Residential Letting'