Raising the Rent

I reviewed the rent of one of my properties this week.

Property One states in its tenancy agreement that I can review the rent on the anniversary of the contract start date. I have never raised the rent part way through the tenancy before, but during these dire economic times, I find myself pushed to make the raise.

It’s always hard to raise the rent, especially when it’s unexpected like this. The media claims that landlords are happily profiteering from their tenants, but this is not true for many. With most landlords, such as myself, calculating the rising costs now and those to come in the future, I don’t want to sting the tenant with a significant rise later. I want to raise the rent slowly and more regularly at manageable levels.

Property One is a three-bedroom semi-detached. Zoopla and Rightmove show an expected rent of £750 – £800 pcm, and I have seen similar properties advertised at £900 pcm. I currently charge £510. The tenant has been there many years, looks after the property and always pays on time. I usually increase the rent by 5% after each two-year tenancy agreement, which, until recently, follows inflation. When the property was first rented, I asked for the going rate. The market has left me behind considerably even though I raised the rent at what I thought were sensible levels. I will have to review this strategy.

I wrote to the tenant this week to explain the situation and that all efforts had been made to keep a rent increase as low as possible. But unfortunately, I had to raise the rent by 5%. Even this increase keeps the rent lower than the area average.

I now receive a rent of £535, which yields 4.5% on the total value of the property of £140,000.

When reviewing the rent, I try to ensure I am getting the average yield for the UK and the area, which currently sits at around 4.75%, so I am receiving just under that.

And I also calculate if I can pass the banks’ stress tests.

Calculating the Banks Current Stress Test

I owe £86,449 on an interest-only mortgage at 2.16% fixed until 2025, which means I pay £155 per month.

The current buy-to-let average rates in the UK, if I were to remortgage tomorrow, are 6.75%.

I predict that by 2025, these rates will be at c.4.5% – 5%. Or should I say, I hope?

Many lenders use a calculation called ICR – Interest Cover Ratio when stress-testing customers.

Factors involved in the calculation:

  • Rent
  • 2yr/5yr fixed mortgage term
  • Tax Status

Rent

As mentioned above, I now receive £535.

2yr/5yr Fixed Term

2-year mortgage = Payrate + 2% (Payrate is the interest on the mortgage)

5-year mortgage = Payrate

Tax Status

Basic rate = 125%

Higher rate/ additional taxpayer= 145%

Ltd Company = 125%

I hold all properties in my name and file a self-assessment to HMRC. I will be looking at buying through a Ltd company in the future. I utilise my wife’s tax allowance, ensuring I stay under the £50,000 limit to stay as a basic taxpayer.

ICR Calculation

Using today’s average buy-to-let interest rate, I failed the bank stress tests due to the figure being under my loan of £86,445, and the bank would not be interested in remortgaging to release some equity.

The bank does not usually stress test if remortgaging with the same lender for the same loan amount.

Conclusion

I could kick the tenant out at the end of the tenancy, renovate at around £8,000 and relist the property at £900 pcm, passing the bank’s ICR and being able to borrow up to £128,000 at 6.75%. This would allow me to pull out all the available equity minus the bank’s 25%.

£140,000 – 25% = £105,000 – original loan of £86,445 = releasing equity of £18,445.

But I’m not going to do that. I’m not that type of person. The property is my tenant’s home, which he loves and cares for, and he is a model tenant. I’m sure many investors would, and that’s the reason landlords have such a bad name and the government steps in to regulate the industry.

I am not out of pocket on the property. The rent covers the costs, and I roughly get the average UK yield.

The tenant can stay for as long as he pays on time and looks after the property. I will raise the rent slowly over the coming years to stay within the chosen metrics I measure the rent against whilst being mindful of the cost of living.

Who knows what the future holds? We could bizarrely find ourselves with low-interest rates again in the future. Then the party starts again.