Interest rates are always in the news. Whether they are static as they have been now for years or whether quarter of a per cent rises are hinted at by Mark Carney, Governor of the Bank of England that might spell economic collapse. Other than homeowners whose mortgage repayments are on the edge of affordability or first time buyers, there are less obvious casualties who are, rather pointedly being made to move over.

The buy to let investor: at best, helping others while helping themselves; at worst ‘a house of multiply occupancy slum landlord’, will start to feel more challenged by the owner/occupier market with George Osbourne’s decision to phase out buy to let tax relief at the higher income tax rate on interest payments by 2020, as well as restricting the “wear and tear” allowance to costs that are actually incurred as opposed to the current blanket 10% write-off. This will affect the projected yield. Despite a higher than average interest rate of 4% for buy to let compared with 3% for the first time buyer, the first time buyer has effectively to pay 5.7% on their repayment mortgage. On top of that, the buy to let investor can currently claim tax relief on the interest of up to 45%, lowering the effective interest rate paid from 4% to 2.2%. That makes the playing field skewed in the investors’ favour.

Once tax relief is restricted to the 20% basic rate, the buy to let investors effective borrowing cost will rise from 2.2% to 3.2%. This is now on the wrong side of many investors’ comfort zone.   Although gross yields average 4.2%, net they only come in at 2.9% which is less than the new effective cost of debt will be. If rates start to rise in the meantime, even if its by a relatively small amount, then the buy to let advantage will be eroded.  This is brought starkly into focus by capital growth becoming increasingly less dependable therefore buy to let investments less attractive.

Once tax relief is restricted to the 20% basic rate, the buy to let investors effective borrowing cost will rise from 2.2% to 3.2%. This is now on the wrong side of many investors’ comfort zone.   Although gross yields average 4.2%, net they only come in at 2.9% which is less than the new effective cost of debt will be. If rates start to rise in the meantime, even if its by a relatively small amount, then the buy to let advantage will be eroded.