Making a good return (rental yield) on your investment property is your best measure of success in the business of buy to let in the short-term. That means increasing rents from time to time. In the long-term landlords also look for growth in the value of the property.
In an economic environment where costs are constantly increasing and when inflation is high, rents must be kept at an economic level, otherwise the venture becomes uneconomic. That means knowing how, when and by how much to increase the rent.
No landlord wants to make the lives of their tenants more difficult than is necessary, but the economic reality is, the rent must be set at a level that is sufficient to cover running costs and leave a margin left over to make a profit, however small, to make the business of running buy-to-lets worthwhile.
The Bank of England made a series of 14 consecutive bank rate hikes to September 2023. This has had a dramatic effect on the rates mortgage lenders charge. It has significantly altered the financial landscape that landlords now face and adds some urgency to the question of rent increases. That’s especially true where landlords have mortgages and/or are highly leveraged.
According to calculations based on Pantheon Macroeconomics research, the interest rate for a two-year fixed interest-only mortgage with a 75% loan-to-value (LTV) ratio increased from just 1.3% prior to the rate hikes, to an eye watering 6.2%, in as little as two years. The result is some landlords with mortgages are struggling with an average monthly repayment increase of £550 when their previously generous fixed-rate deals expire.
According to the latest available English Private Landlord Survey (2021) more than one-third (38%) of buy-to-let landlords had no mortgage or debt. So a rent increase for them has less urgency about it, though allowing rents to fall too far below the market level is not a sensible strategy. This still leaves 62% of landlords who have mortgages with varying degrees of leverage, and there’s a probable need to increase the rent for them.
The increase in mortgage rates is affecting house prices. This will dent the prospects for capital appreciation in the short-term, so it is all the more important to achieve a reasonable rental income. Nationwide reported a drop in average house prices of 5.3% in the year to September 2023. Halifax’s data for the same period observed a 4.7% decrease. Asking prices for homes in Britain witnessed their sharpest annual drop since 2019, according to the property website Zoopla.
The market’s downturn is being blamed on soaring mortgage rates affecting demand for homes, and forcing sellers to cut their prices to secure a sale. The average two-year fixed mortgage rate for an owner occupied property has jumped from around 2.3% in 2021 to 6.46% at the time of writing in October 2023.
At first sight it would seem that a shortage of rental properties in the UK rental market is favouring landlords, with demand outstripping supply and competition for accommodation leading some tenants to offer well over the market rate on a new tenancy. According to the data from Rightmove, the average UK asking rent for new single let tenancies in the private rented sector, excluding Greater London, increased by 10% in the twelve months to September 2023. This is considerably more than Consumer Prices Index (CPI) inflation, which was 6.7% in the 12 months to August 2023.
But with rising interest rates translating into much higher mortgage payments, as outlined above, some landlords are still struggling. This underlines the need to keep an eye on market rents during tenancies and to increase rents to make sure yours keep up.
To continue to maintain a viable rental business, when running costs are rising, but rental demand is strong, leading to rising market rents, landlords may need to find a way of increasing rent in a fair way, and of course doing it legally. Most importantly, to do it without unsettling tenants. Understanding how to approach the situation with your tenants and prioritising good lines of communication from the outset is key to making this work.
The easiest way to increase the rent is when a tenant leaves and you’re setting up a new tenancy. You can then advertise your property at the prevailing market rent, which can be arrived at through comparisons with similar properties currently letting in your location. Read our separate guide on how much rent to charge for more advice on this.
In a contract for a periodic tenancy (rolling on a week-by-week or month-by-month basis), landlords cannot normally increase the rent more than once a year without the tenant’s agreement.
This means finding the right time is important as you’ll only get just one legal chance a year. In addition, increasing the rent more than once in a year would most likely simply frustrate your tenants, even if it was legal.
For a fixed-term tenancy (running for a set period, often between six months and a year), landlords can only increase the rent within this period if the tenant actively agrees to it. If not, the rent can only be increased when the fixed-term ends.
The only exception here is if there’s a clause in your tenancy agreement that sets out how and when you will increase the rent. This might be useful, for example, if your area suddenly increases in popularity, with demand far outstripping supply. It might then be time for an earlier fair and appropriate review of the rent.
Ordinarily, when the fixed-term comes to an end the landlord would enter into negotiations with the tenant about the rent before issuing the tenant with a new fixed-term, or when allowing the tenancy to go periodic.
It is worth bearing in mind that, while it’s important for landlords to make good returns on the investment they’ve put into their properties, sometimes keeping a good tenant is a better reward than increased profits.
Keeping the rent level slightly below the market level will usually prevent the tenants looking elsewhere, triggering a move. The gain in extra rent therefore could be wiped out by the costs and time involved in re-letting.
This is a point of contention amongst landlords and tenants, many of whom might argue about what is fair and what is not.
The UK Government states that all rent increases must be “fair and realistic” and in line with the local average, but this is incredibly vague and difficult to enforce.
Take nationwide statistics with a pinch of salt. While they’re useful as a basic litmus test, it’s more important to look locally before you figure out how much more you should be asking from your tenants.
Look at properties similar to yours and work out what the local average is. As long as you stay within this rate then you can’t be accused of being unfair. Ask local agents who have knowledge of the local market if you’re not sure.
The most important thing is to make sure that the rent renewal date is set out in the tenancy agreement and that you adhere to this process, because otherwise it can lead to disagreements and even messy and unwanted legal action.
If a tenant feels that an increase in rent is unfair then they can take the dispute to a First-Tier Tribunal, where each party will be asked to plead their case to an independent jury. This is definitely not a situation you want to find yourself in. It is likely to cause an irreparable rift between you and your tenants.
If you feel as if you are stuck in a situation where market rent prices are soaring but there’s nothing you can do about it then don’t despair, there are options to consider.
In a fixed-term contract you could negotiate an increased rent with the tenants at the end of the term, or you could speak with the tenant beforehand to agree on a rent increase and record this agreement in a written contract.
This is far more likely to work in your favour if you have a decent, long standing relationship with your tenants. Tenants will generally accept more readily a small but regular increase than when rent levels are left to languish and then a large increase is demanded.
The only other option when rent increase negotiations fail is to file a Section 13 notice. This has been seen very much as the ‘nuclear’ option since it was first instigated in 1988. This allows landlords to increase the rent even if that increase is not stated in the tenancy agreement and the tenants don’t agree to it, as long as the increase is fair and due notice is given.
The landlord must give the tenant sufficient time between the giving of the notice and the increase taking effect. A notice of one month would generally be expected for periodic tenancies, and a notice of six months expected for fixed-term tenancies.
Section 13 notices cannot be filed less than a year apart, and if a new tenancy is in place then the date of the increase should be no earlier than a year after the start date. When it comes to any rental increase it’s always best to think in terms of annual cycles.
Tenants in receipt of housing costs payments through Universal Credit may be able to get extra money to deal with their rent increase, but they will need to tell the housing team at the council about the increase before it starts, and provide evidence such as a letter from you, the landlord. So, make sure you give them plenty of notice and provide them with the evidence they’ll need. As with all rent increases, any increase should be fair and in line with the local market.
Of course, if a tenant refuses a rent increase, it might be a more sensible option to simply end their tenancy once the agreement has run its course and look for new tenants who are happy to pay the increased / market rate. It’s worth knowing that a typical residential tenant will spend nearly four years in the same property and, across the UK, homes take only a short time to let in the current climate.
However, some properties will take much longer to rent out than others and while it is vacant those void periods are costing you money. In addition, leaving your property empty for an extended period of time could attract vandals and invalidate your landlord insurance, so it’s important to check your policy.
A decision to end the tenancy is very much a personal judgement on your part as a landlord. That will depend on the local market and whether or not you’re willing to take a risk. It’s also perhaps fair to say that you are unlikely to develop a lasting relationship with any tenant you’ve filed a Section 13 notice with. So tread carefully.
There has been a sharp rise in the number of rent increases since the higher mortgage rates came in. That’s led to a landscape in which landlords are often vilified in the media, but the truth is they are just trying to make a fair and honest living.
Knowing how and when to increase the rent without upsetting that landlord/tenant relationship and weighing up the wellbeing and the happiness of your tenants with your own bottom line is a delicate balancing act to pull off.
But it’s one that will be that much easier to achieve if you are aware of the limits of the law and (perhaps more importantly) transparent about it.
The Renters’ (Reform) Bill white paper outlines plans to end the use of rent review clauses, "preventing tenants being locked into automatic rent increases that are vague or may not reflect changes in the market price" and says that "any attempts to evict tenants through unjustifiable rent increases are unacceptable".
Under the proposals, rent increases will be limited to once per year in line with the market rates, which is similar to the current Section 13 rules. The minimum notice landlords must provide of any change in rent will be doubled, with two months’ notice of any increase shared with tenants. Read more about this in article, Renters (Reform) Bill: Are tenants being given more power to challenge rent rises?
Getting things right at the start of the tenancy is important. Taking the time to talk through the potential for rent increases at the outset, and making sure this is noted in the tenancy agreement, is also very worthwhile. This will make sure your tenants aren’t faced with any nasty surprises and they are more readily accepting of small but regular increases in rent, perhaps every 12 months.
In some instances, keeping a good tenant will make you better off in the long run, even when your rent is below the market level. You need to factor-in letting costs: marketing the rental, agents fees, preparing the property to let, and your own time, alongside the peace of mind gained from having a tenant you know and trust. In that case, a rent increase might not seem so essential.
It’s all about staying informed and using your landlord’s intuition – knowing your tenants, knowing your properties, and knowing the market.
If you’re struggling with problem tenants who refuse to compromise on your need for a rental increase, contact our partner, Landlord Action, one of the UK’s best known eviction and housing law specialists.. And if your tenants are behind with the rent, you might like to read our guide on what to do if tenants can’t pay the rent and fall into arrears.
