How Interest Rate Risk affects your Property Investment Decisions?

PRLog (Press Release) - Apr. 24, 2012 - The National Office of Statistics Recently calculated consumer price index at 3.5% in March 2012. The upward trend of inflation could suggest that the Bank of England (BOE) may have to raise interest rates this summer. Even the highly positive members of the BOE monetary policy committee, such as Adam Posen, has recently suggested that the governments policy of quantitative easing (printing of money) could have a worrying effect on inflation - according to the Daily Mail.

Readers comments on Fool.co.uk suggest that savers have born the brunt of the spenders’ lack of prudence and that they have been penalised for other people irresponsible actions. The people who save are simply not earning money on their savings. The average interest on savings is a mere 2.65% according to web comparison sites.

If savers choose to invest in property, buy to let mortgages are available with 25% deposits and a variable interest at 4.5%. But with the upward trend on inflation and slow economic growth analysts like Andrew Lilico of the Policy Exchange think tank believe that the Bank of England may have to raise the base rate by as much as 8%. See how an increase in the base interest rate that could affect your mortgage payments  www.thisismoney.co.uk (http://www.thisismoney.co.uk/money/mortgageshome/article-...)

The way that some investors prefer to mitigate interest rate risk is by investing in property where they can pay in cash or obtain interest free developer finance. ‘Our investors have typically purchased  student accommodation investments  (http://www.propertymarket-investment.co.uk/student-accomm...)
and  boutique U.K hotel investments  (http://www.propertymarket-investment.co.uk/hurst-hotel-in...) with as little as £ 15,000 - £ 29,500 cash invested’ says Graham Flaherty of One Touch Property Investment.

According to the Association of Rental Letting Agents  Q4 2011 Residential Property Review  (http://www.arla.co.uk/buy-to-let/buy-to-let-review/2011/q4/ ) the average rate of return for UK residential is 8.87% whereas student and hotel investment returns are 13.5% by applying the same inflation figures.  

It appears to make sense to mitigate your inflation risk and obtain a higher rate of return simply though exploring property investments that have been previously unfamiliar to yourself.