What is mortgage interest?
Mortgage interest is the cost of borrowing money to purchase a property. It is usually expressed as an annual percentage rate and applied to the outstanding loan balance.
In buy-to-let calculations, mortgage interest is typically the largest single expense and therefore a major driver of profitability.
How interest affects monthly payments
The impact of interest depends on the mortgage structure:
Interest-only mortgages: Monthly payments consist entirely of interest. Any increase in the interest rate feeds directly into higher monthly costs.
Repayment mortgages: Monthly payments include both interest and capital repayment. Interest rate changes affect the interest portion of the payment, but total payments also depend on the remaining term.
In both cases, higher interest rates reduce monthly profit.
Why buy-to-let calculations are rate-sensitive
Mortgage interest is applied to a relatively large loan balance. Because of this:
- A small percentage change can translate into a meaningful cash amount
- The effect is felt every month
- The impact compounds over time when viewed annually
For properties with narrow profit margins, even modest rate changes can move a result from positive to negative.
The role of loan-to-value (LTV)
Rate sensitivity increases as LTV increases.
- A higher LTV means a larger loan
- A larger loan means interest changes affect a greater balance
- As a result, monthly payments become more sensitive to rate movements
Lower LTV scenarios typically show more stable cash flow under rate changes, all else being equal.
Interest-only vs repayment sensitivity
Interest-only mortgages tend to show:
- Higher sensitivity to rate changes
- More direct changes in monthly profit
Repayment mortgages:
- Still respond to rate changes
- May show smaller proportional changes in monthly profit
- Include capital repayment, which affects cash flow independently of interest
Understanding this distinction helps explain why two scenarios with the same rate change can produce different outcomes.
Fixed and variable assumptions
Calculations often assume a fixed interest rate for simplicity. In reality:
- Rates may change over time
- Fixed-rate periods eventually end
- Refinancing can alter costs
Calculator results should be interpreted as snapshots based on the entered rate, not forecasts.
Stress-testing interest rates
One way to understand rate sensitivity is to test multiple interest rate scenarios.
This can help answer questions such as:
- How much headroom exists in monthly cash flow?
- At what rate does profit turn negative?
- How sensitive is ROI to rate changes?
Stress-testing does not predict future rates but helps place current assumptions in context.
Interaction with other assumptions
Interest rate sensitivity interacts with:
- Rental income assumptions
- Maintenance and management costs
- Mortgage type and term
A change in interest rates may have a larger or smaller effect depending on these other variables.
How the calculator handles interest rates
The calculator:
- Applies the entered interest rate to the mortgage balance
- Calculates monthly payments based on mortgage type
- Reflects interest changes directly in monthly and annual profit
Adjusting the interest rate input allows you to see how sensitive results are to this assumption.
Summary
Mortgage interest rates are a key driver of buy-to-let performance. Because interest is applied to a large loan balance, small rate changes can have a meaningful impact on cash flow and returns. Exploring different rate scenarios helps interpret calculator results more effectively and understand the trade-offs involved.