How will the interest rate rise affect landowners?
By Accounting for Energy – (2.5 min read)
The recent interest rate increase has caused a stir among the business community. Despite being only the second rise in nine years, some feel the move by the Bank of England was ill-judged against the backdrop of an uncertain Brexit. What’s the impact on landowners’ land rent payments? Read on to find out.
Landowners’ rent payments are generally made up of two fees: Minimum rent which is a flat rate linked to inflation; and turnover rent which is based on energy performance and is affected by interest rates.
The interest rate rise from 0.5% to 0.75% is expected to have a positive effect on rent payments and landowners can anticipate an increase in their earnings for the following reasons:
1. There is still an expectation that inflation, as we explained here, will rise as a result of higher wages in the future leading to a rise in minimum rents.
2. Many landowners receive a fee based on turnover rent which is linked to a percentage of their electricity producer’s sale price. Given that electricity prices are likely to increase based on higher interest rates, landowners should also see an increase in their turnover based rent payments because of this.
3.Higher interest rates would result in higher interest payments if a future rent audit reveals that any rents are underpaid.
There is talk of there being another interest rate rise in roughly 12 months, which could be a green shoot of brighter days ahead. However experts warn that we are unlikely to see rates reach the levels that were experienced pre-recession, so even if your payments do increase over time, the hike will be gradual.
Of course there are many factors to consider that could impact your specific contract, and of course we are still yet to see how Brexit will play out, but at least for now your payments won’t be adversely affected by the recent interest rate rise.
If you would like more information on how interest rates will affect your land rent payments, or if you’d like our specialist auditors to review your contract, get in touch.
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