Buy-to-let mortgage interest relief is being phased out, with some landlords anticipating much higher tax bills and lower profits. Many have stated they will be increasing rents to make up the shortfall. Here Upad founder and CEO James Davis asks, is it worth it?
Research across the board suggests many landlords will raise rents to mitigate the impact of tax changes. Here are the five questions you should ask yourself.
Can the market sustain it?
This is the most important consideration as it’s no longer a matter of supply and demand, but whether the UK rental market will even be able to sustain an increase in rents.
Many tenants are already pushed to their limit with rent prices and are far more discerning as the rental market grows- tenants can only pay what they can afford.
The scrapping of mortgage interest relief won’t affect all landlords, it will hit highly leveraged landlords (over 75% loan to value).
This means landlords planning to increase the rent will be pricing themselves out of the market compared to landlords that are still achieving a good yield and don’t need to cover a tax shortfall.
Good tenants may be forced to leave
Even if you feel you’ve been reasonable in the rent increase, tenants may become offended at the suggestion.
Tenants who look after a property and pay rent on time are worth their weight in gold- consider whether a small increase that may damage your relationship, or force them to leave, is really worth it.
This will have a knock-on effect as you’ll be left needing to advertise your property to find new tenants- opening you up to potential voids.
Tenant affordability at breaking point
Tenants are pushed to their limit with increasing rent prices, London renters are paying as much as 37% of their take home pay on rent, so even a small increase in rent could push them into arrears.
Tenants who don’t want to move may accept the increase and subsequently find themselves in debt later down the line- particularly with a trend of rents and the cost of living increasing far faster than wages.
A Upad survey found that 32% of landlords had experienced rent arrears in the previous 24 months- a growing trend that both tenants and landlords will want to avoid.
The dreaded void
Should your tenant decide not to accept the increase they may give you notice to leave.
During a periodic term, this will be one month. Now you’ll need to prepare your property for market, take photos, book in any repairs and try to arrange viewings with a potentially disgruntled tenant in situ.
Along with this, you’ll have your fees for advertising and management percentages to fork out, unless you self-manage.
These fees can be reduced if you go it alone or use an online letting agent, like Upad.
Once on the market, there’s no telling if it will let for the increased amount and you’ll also need to consider seasonal variations; such as the decline over the Christmas period, and general market conditions i.e. supply exceeding demand.
Void periods can be very costly, even a month’s void means you’re not only missing out on a month’s rent, utility bills and council tax, you will also have to pay the mortgage that month and is money you won’t be able to recoup.
Is it necessary?
If you’re achieving a good yield then remember this is a long-term investment based also on the capital growth of the property. Of course, there are expenses for you as a landlord and particularly with Section 24 pushing up tax bills- profits will be affected.
But on balance it might be better to keep hold of a long-term tenant that looks after your investment and pays the rent in full and on time each month.