Fixed rate takes stress
Trinity Housing Association did its first inflation swap in September last year. The West Midlands-based developer acquires properties on behalf of local authorities in order to provide accommodation for adults with learning disabilities. During 2007, it bought three properties, with identical lease agreements, around Walsall for just under £1 million, says Andrew Elliott, Trinity’s managing director – rent increases annually for 15 years at the UK’s Retail Price Index plus 1%.
Financing for the purchase of the properties was provided by RBS, and Elliott says he’d been keen for a fixed rate loan in order to ease planning. In order to help underpin a 15-year fixed rate mortgage, the bank offered Trinity an inflation swap: "It appealed, in all honesty. It’s a lot easier to do your business plan if you know exactly what your uplift is going to be each year," he says. The swap provides Trinity with a fixed inflation rate of 2.99%, plus the fixed 1% written into the contract, thus enabling the association to get better terms on the financing, says Elliott.
"Interest rates are dropping at the moment, so if we hadn’t gone for a fixed-rate loan we might have been better off at this point – but that doesn’t make so much difference to us," he says.