How Will A 0.5% Mortgage Rise Hit Your BTL Business?
Landlords worried about the impact of changes to tax relief on mortgage interest coming in from next April also need to work out how mortgage rate increases will hit their property businesses.
High earners paying income tax at 40% will have their mortgage finance relief on buy to let cut in half by 2020.
By then, the Bank of England expects to gradually increase the official bank rate to a ‘new normal’ of at least 2.5% from the current 0.5%.
A survey of homeowners by online estate agency eMoov has revealed four out of 10 mortgage payers have no idea how this will affect their repayments.
As an example, the average house price in England and Wales is £186,553, according to the latest available figures from the Land Registry.
Assuming a 75% loan-to-value (LTV) buy-to-let mortgage charged at an average rate of 3.5%, the interest paid each month now is £408 a month. If the rate rises by 0.5%, this would add £58 a month to the repayment, bringing the figure up to £466 a month.
Taking the rate up by 2.5% to 6% by April 2020, when the full cut in mortgage finance relief takes effect, the mortgage payment will have risen to £699 a month with a tax relief of 20%, which is £140 a month.
Most examples of how mortgage finance relief will hit landlords are worked out on current mortgage interest rates, but raising rates and slashing tax relief could push many landlords into the red.
If the average monthly rent of £750 increases in line with inflation, it’s likely to rise around 2.5% a year between now and 2020 to £869 a month, leaving a narrow margin between mortgage interest payments and rent received.
The figures for April 2020 work out like this:
- Rent: £10,428
- Mortgage interest: £8,388
- Net profit before tax relief: £2,040
That includes insurance, letting costs, maintenance and other business expenses. eMoov CEO Russell Quirk said:
“A jump of £50 to £100 per month on a 0.5% rate rise might seem insignificant to most, but for those who have borrowed up to the hilt, it could be catastrophic.
“Despite the comfortable economic climate, many UK homeowners are counting every penny to get by. So an increase of more than £1,000 a year could soon snowball into more substantial debt.
“The reality is that interest rates will rise eventually and when they do, it’s likely to be by more than 0.5% over a short period. So regardless of what loan to value ratio you currently have, your monthly payments will increase by at least 5%.”
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