With a possible rise in interest rates on the horizon lets look at how this may impact Grantham landlords. More than six years have passed since buy to let landlords can no longer claim mortgage interest as a tax-deductible expense, and from Jan 31st, 2022, the four-year phasing-in cycle and knock-on impact for tax payments on account will finally be complete.
In particular – due to low borrowing costs and increasing rents, many landlords have better cashflow now, despite the tax changes.
Of course, we have had 12 years of record low and decreasing interest rates. But with inflation running above 4 percent – most landlords will feel that interest rates can only go one way from here. So, what happens to a landlords cashflow if and when mortgage rates rise?
Of course, if you have no mortgages, you won’t be directly impacted. So, the answer to this question really depends on a landlord’s personal situation.
The more leveraged you are, the more sensitive your portfolio will be to rising rates – depending on your rental yields and profit margins. To illustrate the potential challenge, we will look at a landlord partnership running at 75 percent loan to value.
Take a £4m portfolio with £3m in mortgages, a relatively healthy gross rental yield of six percent with 20 percent expenses and a mortgage rate of two per cent. Assume that the landlord is a full-time husband-and-wife partnership, the total post-tax income for the couple would be £92,344 – or a return of 9.2 percent on their £1m equity.
Should interest rates rise to 5.5 per cent (the minimum level at which lenders must stress test), then an additional £105,000 in annual mortgage expenses absolutely decimates the profitability of the portfolio, leaving our husband-and-wife team with just £8,344 to live on between them.
You can see how rising interest rates could really start to bite (This information is supplied by Less Tax 4 landlords).
Of course, it might be argued that as long as wages and inflation follow suit, rising interest rates will be accompanied by rising rents. But that’s no guarantee.
And what’s worse, because of Section 24, landlords who are higher rate taxpayers will need to charge an extra £1.25 in rent for every extra £1 of mortgage interest – just to maintain the status-quo.
If you are one of the Grantham Landlords affected by these changes then why not contact us so we can discuss your options.