Will your letting business survive if interest rates rise?
Property investors are waiting anxiously for the inevitable rise in mortgage interest rates at sometime this year.
Many landlords are only showing rental profits because mortgage rates have dropped and they have two concerns:
1. How much tax they will pay if interest rates stay low and they have no rental business losses from previous years to set off against profits.
2. What will happen if mortgage rates go up with the bank base rate – especially if rental properties stand empty?
To help property investors work out how they will cope with rising interest rates, here are four tests that identify if borrowing will go toxic:
3. Does rent cover the buy to let mortgage by 125% at an interest only rate of 5%?
Buy to let lenders suggest borrowing £132,000 at 80% loan-to-value on a buy to let valued at £165,000 needs rent cover of £686 per month.
4. Does your rent include a buffer against rate rises?
A 0.25% mortgage rate rise on £132,000 a 5% interest-only mortgage adds £27.50 to the monthly repayments.
A 5% £132,000 interest-only mortgage costs £550. Add insurance, letting agent fees and repairs - then a couple of 0.25% base rate rises puts the monthly costs at around the rent charged.
5. Do you have a fund to cover voids?
If you have no spare cash now to cover rental voids and unexpected repairs, where will the cash come from to pay the bills if the property is empty?
6. Do you have a plan to pay off your mortgage?
Many buy to let landlords are reliant on house price inflation and a buoyant market to cash in their investments when they retire. The current housing market has stopped this idea and landlords now need a plan B as an exit strategy.
If a buy to let mortgage fails these stress tests, landlords need to check out their finances to tackle the impending cash crisis.
