What if the mortgage rate rises from 4% to 6%?

Assumptions

Annual interest

The annual cash cost rises by £3,000, equivalent to £250 per month. If every other assumption is unchanged, annual pre-tax property cash flow falls by the same £3,000.

Why this matters

If the property produced £5,929 of pre-tax annual cash at a 5% rate, moving one percentage point higher to 6% would reduce that figure to approximately £4,429. A two-point movement from 4% to 6% has a £3,000 annual effect. The precise starting cash flow depends on all other assumptions.

Repayment mortgages are more complex

For a repayment mortgage, the payment change depends on the balance, remaining term and rate. The split between interest and principal also changes each year. Use an amortisation calculation rather than applying the interest-only formula.

Useful stress tests

• Expected rate after the current fixed period.
• Expected rate plus one percentage point.
• A temporary void at the same time as refinancing.
• A major repair during the higher-rate year.

The question is not only whether the long-term IRR remains positive. It is whether the owner can fund the annual cash requirement if several pressures occur together.