Last week the Bank of England raised the interest rate for the first time since July 2007. Keep reading to see what that actually means for your buy-to-let investments, including what you’ll see after tax.
The rate rise
The Bank of England rise was fairly small, from 0.25% to 0.5%. Across a portfolio of properties this can add up quickly though, especially if your portfolio is highly geared.
To put it into money, if you’ve got a property with a £150,000 tracker mortgage, you’ll soon be paying an extra £375 per year (£31.25 per month).
Assuming your property is making a profit, the extra interest will at least also reduce your tax bill a little. This effectively reduces the cost of the interest rate rise.
Last (tax) year, for a 40% tax payer, our fictional mortgage above would have only actually cost £225 extra. However as mortgage interest relief has already started to reduce, in 2017 it will cost you £243.75 per year.
When mortgage interest relief is reduced to it’s final state in 2020/2021, this rate rise will be costing you £300 per year (per £150,000 of tracker mortgage).
…and for you
Looking at the example above is great, but almost certainly not right for your situation. So how do you work out the actual effect for you?
In 2020/2021 the effect will be the same for everyone as there will only be 20% tax relief on all buy-to-let mortgage interest. At that point, a 0.25% interest rate rise will actually cost you, after tax, 0.2% of your mortgage balance (assuming your mortgage rate tracks the base rate) per year.
In the 2017/2018 tax year it’s a bit more complicated. If you pay 40% tax on your buy-to-let profits then a 0.25% interest rate rise will actually cost you 0.1625% of your mortgage balance.
More on buy-to-let profit and mortgage interest relief
We have a previous blog post where you can read more about tax relief for buy-to-let mortgage interest and how it’s changing over the next few years.
You can get a personalised calculation for your next buy-to-let purchase or remortgage (including how interest relief will change it) by using our free buy-to-let profit calculator (or our buy-to-let remortgage calculator).