Carefully plan your route ahead to scale rising interest rates on buy-to-let mortgages
Is Britain’s first interest rate rise in 10 years the last straw for landlords?
We’ve had higher taxes, tougher mortgage rules and a slow market — and now our biggest cost is going up. What should we make of it all?
The rate rise
Last week’s 0.25% rise in the Bank of England base rate to 0.5% may be small, but it is magnified for buy-to-let owners: almost all have interest-only mortgages.
On a £200,000 interest-only loan, your monthly payment goes up £40 — compared to £25 for a homeowner on a repayment mortgage.
Is it a sign of more to come? Mark Carney, the governor of the Bank of England, promised that rates would go up “at a gradual pace and to a limited extent”.
The tax rise
Even as you pay more interest, you can offset less of it from your tax bill under changes phased in since April.
As a result of these “Section 24” changes, the average London landlord is set to pay almost £900 extra in tax this year, according to Direct Line for Business. (For how this works and what you can do, see our last newsletter.)
The mortgage bind
Since January, tighter buy-to-let mortgage rules have made it harder for all landlords to remortgage or buy more.
Most lenders now require the rent to cover 145% of the mortgage payments, up from 125%, tested at an interest rate of 5.5%.
In expensive areas such as London, the new rent ratios have made it all but impossible for landlords with as much as 40% of equity to refinance this year.
Once the initial term for their fixed rate passes, they are at the mercy of variable rates, which last week started to rise.
In October alone, the number of mortgage products for small landlords fell 13%, reports Moneyfacts.
Rules have also tightened further for owners of four or more buy-to-lets: lenders must now check income across their whole mortgaged portfolio, not just the property they want to buy or refinance.
Our verdict
More than ever, us accidental landlords have to get deliberate. We are some way off from breaking point. But tax costs and interest rates will only rise over the next years, so get ready.
If you haven’t already, work out how the new tax rules will affect you. Get advice on what steps you can take, such as transferring ownership to a lower-earning spouse.
If your mortgage is nearing the end of its fixed-rate term, talk to a broker now to refinance before more deals disappear.
According to the latest forecasts, which we explain here, the property market outlook is brightening up — albeit slowly. We think it’s worth holding on, but to do so you’ll need to plan ahead.
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