How would your Buy-to-Let cope with a rate hike?

Mark Carney, the Bank of England governor, initially announced that he didn’t expect to implement interest-rate rises until 2016. This prediction now seems to have been a little premature, suggesting existing and new buy-to-let investors should stress test their portfolio for future rate hikes.
Although the Bank of England reports that any interest rises in 2014 are unlikely, as the recovery appears to be gathering steam some are predicting the unemployment rate could fall from its current 7.7 per cent to 7 per cent by as early as 2015. This is one of the “trigger” points that the governor has indicated he would use to consider raising rates.

The impact of interest-rate rises for buy-to-let investors will differ depending on whether you are a cash investor or on the terms and conditions you have with your lender. In addition, you may be on different types of mortgage rates such as a tracker, variable or fixed.
However, we’ve already seen that tracker mortgages might need more scrutiny, thanks to the efforts of the Bank of Ireland and West Bromwich Building Society to increase their rates. Whatever your circumstances, if you borrow money to invest in property, knowing and understanding the impact of mortgage rate rises on your portfolio is essential.

Typically, buy-to-let investment needs to be held for at least 15 years to deliver a good return. In the last 15 years, mortgage rates have reached as high as 7 per cent.

Cash investors are protected from mortgage-rate rises, but for those with a mortgage, it is worth checking if your rental income will be able to support short-term or a sustained long-term rate of 7 per cent. If you can’t, consider a back-up plan so you can retain your portfolio. It is probably worth consulting your lender or broker to find out what can be done to protect yourself as well as your investment.

Kate Faulkner is managing director of Designs on Property.