Property Magazine is the National Residential Landlord Association’s flagship publication, covering all things property and providing expert insight into the private rented sector.
From time to time Less Tax 4 Landlords are known to feature in the publication, and we keep this page open to provide further information on our articles, adverts, and mentions in the magazine.
Currently, we have just set up this post for the latest Autumn 2021 magazine and will be adding information from back issues shortly.
In the article we looked at an example of a landlord with a reasonably profitable portfolio and how that could be impacted by interest rate changes.
The following covers the example in a little more detail:
Today lenders lending to portfolio landlords are required to apply a stress test at 2% higher than the interest rate agreed for the loan and subject to a minimum of 5.5%.
If for example we take a landlord with a £4m pound portfolio and £3m in mortgages (75% LTV), with an average mortgage rate of 2%, that’s £60,000 per annum in interest payments.
For our landlord sitting on the fence with a healthy gross rental yield after voids of 6% (£240,000), and expenses of 20% (£48,000), they will be paying tax on £192,000 profit. Assuming this landlord is actually a husband and wife partnership, then the total income tax payable will be £51,664 before a 20% credit for finance costs of £12,000 is added back.
£192,000 taxable profit minus £60,000 mortgage costs minus £51,664 tax plus £12,000 Tax Credit = £92,336 post-tax income for the couple, or a return of 9.2% on their £1m of equity.
Should interest rates rise to 5.5%, a level not seen in many years but common in the 00’s, then that’s another £105,000 in annual mortgage expenses. Yes another £21,000 in available tax credit reduces our landlords tax bill to £18,664, but it absolutely decimates the profitability of their portfolio, leaving them with just £8,336 after tax – or 0.8%.
At Less Tax 4 Landlords we have a saying which is “don’t let the tax tail wag the planning dog” and this is a good example of why.
Of course it might be argued that as long as wages and inflation follow suit, rising interest rates will be accompanied by rising rents. Though for landlords who are higher rate taxpayers losing out for every £ of mortgage interest paid, they will need to charge an extra £1.25 rent for every extra £ of mortgage interest, just to maintain cashflow.
All of the above is certain to make an interesting dynamic in the property market in the coming decades as rates increase.
