Buy-to-Let Will be Unprofitable in Most Areas if Interest Rates Rise

Investing in traditional buy-to-let could become unprofitable in seven out of ten UK towns and cities if interest rates rise by 2.5% over the next four years, according to a new study.

Property Partner has analysed over 100 of the largest towns and cities in the UK to consider what impact an interest rate rise, alongside the forthcoming changes to mortgage interest tax relief, could have on local buy-to-let markets.

The research covers the next four years to 2020, when buy-to-let landlords will have lost the ability to claim the higher rate of tax relief on their buy-to-let mortgage interest payments.

The research took an average property, rented out at a price typical of the area in each town or city covered. It assumed that the property was mortgaged with a 60% loan-to-value buy-to-let loan, at a fixed rate of 3% for three years.

In the country as a whole, the average annual net profit on this property would be £3,419 today, but would drop to £2,555 by 2020, even if rates remained at 3%. This decrease in profit would be down to the phasing out of mortgage interest tax relief.

The study paints a worse picture if interest rates were to rise by 2.5% by 2020, with the same property making a loss in more than two-thirds of towns and cities, with an average loss of £325 per year.

In Salisbury, Property Partner found that buy-to-let landlords, currently making an average annual profit of £2,200, would be in debt of £2,984 a year with a combined interest rate rise and reduction in mortgage interest tax relief.

However, economic analysts believe that interest rates might not rise until at least 2020.

The gradual phasing out of buy-to-let mortgage interest tax relief will begin in 2017.

For the upcoming changes to the buy-to-let sector, read this interesting piece by Nova Financial’s Paul Mahoney, who insists that buy-to-let “is not dead”: /contrary-to-popular-belief-buy-to-let-is-not-dead-insists-finance-firm/