A fiscal U-turn without precedent!
A fiscal U-turn without precedent!

What is the effect of base rate increases on Landlords?

The recent base rate increase to 3.5% means that many lenders have followed suit and either withdrawn their fixed rate products or increased their borrowing rates, with some lenders charging in excess of 7% per annum on company buy to let mortgages.

Whilst this is not too drastic an increase, Bank of England will make additional interest rate increases in new year, and landlords can assume that the base rate will be 4% or slighly higher in the first quarter of 2023….

This all means that if your mortgages fixed rate or discounted rates comes to an end in early next year, the new mortgages could end up costing you almost double or even three times what you’re paying now…

Unless your rental income is sufficient from the property to swallow the additional interest rate charge, either the lenders will not lend, or will lend a reduced amount to ensure sufficient interest rate cover, which could mean making lump sum payments to reduce the overall borrowing to 60% or 65% borrowing, or if the lenders do lend higher, than landlords may make short term losses.

For example, a landlord has a property which he bought for £650,000 with a borrowing of £400,000 at 3%. His rental income will probably be £1,650 per month, with mortgage interest cost of £1,000 and other operating costs of £250, to leave him with a profit of £400 per month. If he were to refinance this mortgage, he may find that maximum lenders will now lend him is £350,000 at 7%, so first he will have to contribute £50,000 towards his mortgage, his new mortgage interest payments will be £2,041, so he will have to increase his rent by minimum £400 per month, just to cover additional interest rate charges.  He may find it very difficult to find tenants to accept the increase, so will probably end up agreeing rental at £2,000 per month in hope of tapered increases in rents every six months, and make short term losses. Or he may get a tenant willing to pay him £2,200, which after operating costs and interest charges would still make a loss per month.

Incidentally, even HMRC are now looking at overall gearing of property businesses, by measuring operating profits against borrowing, and too much borrowing or insufficent profit margins will trigger an enquiry from HMRC.

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