Higher interest rates will KILL buy-to-let property market
Example of buying a £500,000 property with a £20,000 a year rent or 4% yield. That’s all very well but if you are then borrowing money on say an 80% mortgage, in the past your mortgage payments based on a 2% interest rate would be £8000 a year leaving you a gross profit before cost of £12,000 per annum.
Then interest rates went up to 4% meaning that your mortgage payments rose to £16,000 per annum.
At 5% your mortgage payments will be £20,000, in which case you would not even break even after paying costs such as insurance and letting agency fees.
At 6% per annum your mortgage payments would be £24,000 a year leaving you with a loss of £4000 per annum before costs.
However, that’s not the whole story. Rates are expected to go higher and have already breached 6% for the residential market based on five-year fixed rates.
At 8% the interest only mortgage on a £400,000 loan Will be £32,000 a year.
Even if you only borrowed £300,000, the mortgage payment will be £24,000 a year not only leaving you a loss but an obtainable from the lender which would want a buffer zone in case of rental void.
The higher the interest rate the less you can borrow.
It’s unlikely that the lender would give you more than £200,000 based on an 8% interest rate, which would mean that you would need £300,000 as a deposit.
In short, higher interest rates will wipe out any hope of a monthly residual yield or profit for buy to let buyers using islands value by to let mortgages.
Bearing in mind that the high growth model for most investors is based on using maximum leverage and borrowing against their properties, higher interest rates will wipe out a large percentage of the potential buyers as the deals no longer stack up.
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