Rates, Property Prices and Buy-to-Let Profitability

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It can’t have gone unnoticed by the 80% of mortgage brokers invested in the buy-to-let sector, that property prices are rising fast in many parts of the country.

The Nationwide, for example, say that average property prices are increasing at 11.1% per annum. This represents a 25% return for a 60% geared investor.

Obviously these price rises are unsustainable in the longer term, as maintaining yields will require that rents rise too.  Ultimately the ability of tenants to pay may cause many prospective investors to think about further costly acquisitions.

There is even a possibility that property prices might fall if the bubble bursts and this must be considered against a backdrop of rising mortgage rates.

With respect to mortgage rates it is not a question of if but when and by how much. Given these facts, I thought it would be interesting to look into the effects on buy-to-let profitability of rising and falling property prices and mortgage rates. With a 60%gearing the results on profitability are shown in the table below:

Price and rate Table

I would urge brokers with buy-to-let portfolios, or those advising private sector landlord clients, to build similar models to calculate the impact of changes to property prices and rising mortgage rates.  The results are very interesting.

NB: I used a gross yield of 6.2%, but then deducted 1.5% for lender fees, legal costs, stamp duty, repairs, maintenance, insurance, agency costs and provisions for arrears and voids, etc.  This brought the net yield to 4.7%.  I also used a deposit rate of 1.6%, to calculate opportunity costs, which was sourced from the Bank of England.  Obviously a more complex analysis could be developed.