Break-Even Rate
The mortgage interest rate at which a rental property's monthly cashflow hits zero. The single clearest measure of how much rate risk a leveraged deal carries.
Every leveraged rental property has an interest rate at which profit disappears. That is the break-even rate: the point where rent minus all running costs exactly equals the mortgage interest.
A worked example
A property rents for £1,100 a month and carries £320 of monthly running costs (management, insurance, maintenance allowance, voids averaged out). That leaves £780 to service the mortgage. On a £150,000 interest-only loan:
Break-even rate = £780 × 12 ÷ £150,000 = 6.24%
If the current product is at 4.8%, there is a 1.44 percentage point safety margin. If the deal only works at 4.8% and breaks at 5.2%, it carries very little resilience for a remortgage in a worse market.
How to use it
Calculate the break-even rate before buying and again before every remortgage. Compare it against the rates lenders are actually quoting plus a margin for deterioration. A deal with a break-even rate comfortably above prevailing rates can ride out a bad rate cycle; one without is a bet on rates staying friendly. RealYield's stress test calculates this automatically and lets you stress voids and costs at the same time.