Rent Increases Due to Rental Cover Needed?
Published / Last Updated on 31/07/2023
Currently, we keep seeing news across television and websites that tenants are struggling with rents going up 10%-20% with many blaming greedy landlords. We admit there may be some unscrupulous landlords out there, but have you thought the landlord’s hands may be tied by new laws issued by governments as well as mortgage lender requirements.
New Laws Imposed on Landlords
- Fire Safety (England) Regulations 2022 (Scotland, Wales, Northern Ireland also have their own regulations): following Grenfell, requiring apartment blocks to have fire safety surveys and make improvements for alarms, sensors, fire doors, communal fire doors, cladding replacement, regulator fire safety inspections, and more. None of this is cheap.
- Energy Performance Certificates: From 2025, all landlord properties taking in a new tenant must have a minimum EPC rating of C or above and from 2028, all landlord properties with existing tenants (having not changed tenancy for a few years) must also have a minimum EPC rating of C or above. It is not cheap to replace heating systems, water systems, double glazed windows, insulation of walls, insulation of floors and roof spaces.
- Mortgage Interest Rates: Mortgage interest rates have more than doubled in the last year meaning landlords with mortgages on properties have been hit just like anyone else without a mortgage.
- Mortgage Rental Cover: You may or may not be aware that ‘buy to let’ mortgage lenders usually have a requirement that the rent to be charged on a property must be at least 40% higher than mortgage interest only payments due. 140% rental cover means that if the landlord’s mortgage was to cost £500 pm, they will not lend unless the rent charged is a minimum £700pm. This is top protect the lender should the landlord default and the property need repossessing. Lenders want the security to know that rents due will cover mortgage interest plus additional management costs. Again, this is another blow to both landlords and tenants.
These costs have all hit landlords hard. Let’s look at an example (in fact it is one of this website’s director’s ‘buy to let’ properties.
1 Bed Flat in Cornwall. Purchase price £133,000 (5 years ago). Deposit £33,000, Buy to Let Mortgage £100,000 over 25 years.
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Old Mortgage Rate 2.74% pa 5 Year Fixed |
New Mortgage Rate 4.99% pa 5 Year Fixed |
Tenant Cost to Buy Equivalent Rather Than Rent |
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Capital and Repayment Cost |
£460.80 pm |
£643.69 pm |
£643.69 pm |
|
Interest Only Repayment Cost |
£228.33 pm |
£499.17 pm |
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140% Rental Cover Required by Lender |
£319.62 pm |
£698.84 pm |
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% Increase in Minimum Rent Req’d by Lender |
|
119% increase |
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Landlord Insurance |
£7.00 pm |
£10.00 pm |
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Maintenance Fee for Flat |
£90 pm |
£100 pm |
£100 pm |
|
Total Monthly Exps. for Landlord (Interest Only) or Tenant Buying Same (Repayment) |
£325.33 pm – so rent expected c. £450 - £550 pm |
£609.17 pm – so rent expected c. £700 - 800 pm |
£743.69 pm |
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Capital Expenditure |
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Deposit for Property Purchase |
£33,000 |
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£33,000 (or likely even more as property prices have increased) |
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Fire Door/Fire Safety Improvements |
|
£1,200 |
£1,200 |
|
Energy Performance Improvements to Grade C (upgraded water heater, main heating, insulation) |
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£5,000 |
£5,000 |
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Communal Roof repairs |
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£800 |
£800 |
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Total Cost to Landlord |
£325.33 pm + £33,000 Deposit |
£609.17 pm + £7,000 capital expenses |
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Total Cost to Tenant (or if buys equivalent) |
£550 pm rent |
£750.00 pm rent (given minimum rental cover of £698.84) |
£743.69 pm + £40,000 capital expenses (or likely even more as property prices have increased) |
Landlords are under as much pressure as tenants with cost increases to finances in addition to capital expenditure for fire safety and EPC requirements. In addition, tenants should be in a fortunate position of living in a property that is or will be energy efficient as well as fire safety improvements whereas a homeowner may not be in the same position as there are currently no requirements for owner/occupied properties to have fire safety or EPC improvements unless they are apartment blocks or homes of multiple occupation (HMO).
