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Monday, February 29, 2016

If rates rise by 2.5% landlords will be in jeopardy

Forget rental profits, many landlords could soon be running their rental businesses at a loss, reliant on capital growth to off-set an otherwise unsustainable situation according to research by property crowdfunding platform Property Partner.

If interest rates rise by 2.5%, it will push the average UK BTL property into a loss, with an estimated  annual loss of £325 by 2020 and the introduction of Osborne’s mortgage tax relief changes.

They predict that Salisbury, would be the worst hit region - with a prospective loss of £2,984 per year if rates rose 2.5% by the time Osborne’s mortgage tax relief changes came into full effect.

Just 19% of UK towns and cities will see their average BTL property continue to make a net rental profit of more than £100 a month, in the event of a 2.5% rise.

Instead of rental profits, from 2020 onwards, buy-to-let returns would be reliant on capital growth.

The chancellors mortgage interest tax changes could affect 1.7m mortgaged BTL properties.

London, 29th February 2016 -- If interest rates rise by just 2.5% over the next four years, traditional buy-to-let could become unprofitable in seven out of ten UK towns and cities and the average investment property would be making an annual loss of £325, according to research by property crowdfunding platform Property Partner.

Property Partner looked at more than 100 of the largest towns and cities in the UK, to see what impact interest rate rises, coupled with the changes to mortgage interest tax relief, would have on local buy-to-let markets. By 2020, buy-to-let investors will have lost higher rate tax relief on their mortgage interest payments.

Property Partner’s researchers took an average property, let out at a rent typical of the area in each of the towns and cities studied. They then assumed the property was mortgaged with a 60% LTV buy-to-let loan, fixed for three years at 3%**.

Taking the country as a whole, the average annual net profit would be £3,419 today, but would fall to £2,555 by 2020, even if rates remained at 3%, as a result of the phasing out of mortgage interest tax relief. That’s an average drop of £864. But the figures are even starker if interest rates were to rise 2.5% by 2020, with the same average buy-to-let making a loss in more than two thirds (69.8%) of towns and cities, with an average loss of £325 per year.

Which towns and cities will fare the worst? In Salisbury, buy-to-let landlords currently make an average annual profit of £2,200. By 2020, with both a cut in mortgage tax relief and a modest 2.5% rise, they will feel the full impact with debts mounting to £2,984 per year - that is a swing in fortune of £5,184. In Cambridge and Winchester, the reverse in fortune would be even greater, with healthy profits turning into hefty losses. In Cambridge, the average profit today is £4,257 but would plummet into the red with a £2,418 annual loss in 2020. Similarly, in Winchester, an annual profit today of £5,835 would be wiped out, and landlords would be facing an annual debt of £2,169.

The figures also reveal that 11 out of the 20 towns and cities worst hit by the changes to mortgage interest tax relief and a 2.5% rise in interest rates are in southern England. Also, less than one in five (19%) UK towns and cities will make a net rental profit of more than £100 per month.

The following table shows the 20 worst hit towns and cities in the UK in the event of a 2.5% interest rate rise
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1 comment:

Ian T Price said...

Anybody spot the obvious bias in these figures? They have picked some of the lowest yielding locations in the country.

I have a £190k property in Bracknell at £1,050. I have another £75k property in Manchester earning £650.

Look at the yields if you're looking for a long term income generating business.

If you're looking for capital growth then these figures show that you should take the money and run as soon as interest rates rise.

Which is exactly what Osborne says his policies are intended to prevent...