Rate rise could force landlords into debt by 2020

Rate rise could force landlords into debt by 2020

The latest research by property crowdfunding platform, Property Partner, has claimed that should 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.

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 hits towns and cities in the UK, ranked in order of the annual loss that would be made on a rental property in 2020 if interest rates went up by 2.5%.


Town/City

Average House Price (£)***

Average Rent/pm (£)****

Annual profit today (£)

(3% B2L mortgage)

Annual profit 2020 (£)

(3% B2L mortgage)

Annual profit 2020 (£)

(5.5% B2L mortgage)

Salisbury (South West)

332,314

804

2,200

1,003

-2,984

Chichester (South East)

396,978

1,072

3,431

2,002

-2,762

Truro (South)

307,431

752

2,094

987

-2,702

Cambridge (East)

427,856

1,233

4,257

2,716

-2,418

Lichfield (West Midlands)

280,112

702

2,029

1,021

-2,341

Exmouth (South)

269,365

671

1,922

952

-2,280

Warwick (West Midlands)

362,429

1,015

3,394

2,089

-2,260

Winchester (South)

513,075

1,580

5,835

3,988

-2,169

Chelmsford (East)

348,875

978

3,274

2,018

-2,169

Taunton (South West)

257,281

649

1,894

968

-2,119

Cheltenham (South West)

324,248

914

3,079

1,912

-1,979

Bedford (East)

291,484

797

2,590

1,541

-1,957

High Wycombe (South East)

387,656

1,151

4,101

2,705

-1,947

Hemel Hempstead (East)

355,176

1,033

3,602

2,323

-1,939

Chester (North West)

248,346

644

1,955

1,061

-1,920

Newquay (South)

249,375

656

2,030

1,132

-1,860

Guildford (South East)

554,542

1,782

6,841

4,845

-1,810

Solihull (West Midlands)

341,470

1,002

3,527

2,297

-1,800

Basingstoke (South)

313,838

901

3,098

1,968

-1,798

Shrewsbury (West Midlands)

235,042

619

1,918

1,072

-1,748

 

Despite the challenges ahead, many traditional buy-to-let investors are rushing to complete on new property purchases, to avoid April’s 3% stamp duty surcharge, according to the Royal Institute of Chartered Surveyors (RICS). Property Partner’s own evidence suggests many others are looking at alternative ways to invest in residential property without the hassle, expense and tax implications.

Through Property Partner, for example, investors will be unaffected by changes to mortgage interest tax relief, because each property investment is held in a limited company and therefore able to offset interest against rental income. Property Partner has launched a buy-to-let calculator www.propertypartner.co/buytoletcalculator, which shows landlords, at a glance, the full impact of the cuts to their income as a result of the changes to mortgage tax relief.

Anyone can buy shares in residential property at the click of a button via the online platform. People can invest as much as they like, starting from as little as £50. Investors then receive rental income each month in the form of a dividend, and see capital returns in direct proportion to how much they own. And they can trade their shares with other investors on Property Partner’s unique resale market.

Dan Gandesha, CEO of Property Partner, comments: "The phased withdrawal of mortgage interest tax relief will be felt across the country, but add in a modest interest rate rise, and many investors will see their rental profits completely wiped out.

When you factor in April’s stamp duty hike on new property purchases, it’s clear that direct investment in buy-to-let no longer adds up. Traditional landlords from Land’s End to John O’Groats need to face up to the stark reality. In a few years, the whole structure of the UK housing market will have changed.

At Property Partner we’re seeing traditional landlords abandoning direct property investment and coming to us instead. It’s a tipping point. Landlords will lose out but millions more will be better off, with more affordable homes for first time buyers, more high-quality accommodation for tenants, and an asset class made available for everyone to invest in.”

Case study:

Buy-to-let landlord Jaye Cook, who owns five properties in Kent, is so worried about the chancellor's tax changes that he's planning to offload some of his existing portfolio.

Jaye, 37, who rents three buy-to-let houses and two flats, said: “My biggest fear is that I’ll start to make a loss every month once this landlord tax kicks in as we’re going to be taxed on the revenue rather than the profit. These changes will force landlords to raise their rents to make ends meet or they’ll sell up and create a glut of buy-to-let properties on the market.

I’m still a big advocate of property. Once my fixed rates on some of the properties come to an end, I’m thinking of selling and reinvesting in Property Partner. I’ve already remortgaged some of my properties and invested hundreds of thousands through the platform.“

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