Investment returns could disappear

Calculations from Your Money indicate that new property investors could see their cash flow turn negative by 2017.

Projections are based around a property investor who has borrowed 70% of a residential investment property on a loan with the loan base rate of 3.4%.  With the bank base rate of 0.5% and the current mortgage costs of 3.9%.  Should the bank base rate rise to only 3% (a sixfold increase) the mortgage rate would double to 6.4%.  Have a look at the most recent interest rate projections.

The suggestion from Your Money is that in London for example, where the average valued property of £291,500 would attract a monthly rent of £1121.  An interest only mortgage of 70% of the property value is £204,050 would at a rate of 3.9% equal a monthly cost of £633 leaving a rental profit of £458.  But at a mortgage rate of 6.4% the mortgage cost would increase to £1088 giving a rental profit of just £33 per month.  This is before other rental expenses that could easily amount to another 1.5-2% of the gross rental yield

All this could lead to landlords being confronted by a rental loss within a couple of years.  Booming capital values would obviously compensate for any rental shortfall but if they don't materialise then investment returns in the short run may disappear.

All this is food for thought for highly geared landlords. Landlords can use our BTL mortgage search to find the best deals from the market.