‘I’m a landlord and my mortgage goes up at the start of 2024. Can I pass this on to my tenants?’
Is the mortgage market turbulence getting you down? Have you got a mortgage-related question you need answering? Email in and we’ll get one of our experts to reply. Nick Mendes, mortgage technical manager at John Charcol, has given his advice to a reader below. If you have a question for our experts, email us at [email protected]
Question: I’m a landlord and have been one for several years now. I have a small portfolio of three flats and generally try to get my tenants in on three-year leases.
Two of the properties have come to the end of their leases and I have renewed these. I’m loathe to put up the rent, but have had no choice because the mortgage was going up significantly, and if I had not done so, I would have been operating at a loss and my only alternative would have been to sell the property.
I have one property where I am losing money. These tenants are on a three-year lease that ends in August, but the mortgage for this property comes up in February and will get significantly more expensive. The mortgage will go up by around £300 per month because I am coming off an extremely cheap deal and, as a result, I’ll be losing money each month for the privilege of being a landlord.
Operating until August at a loss is likely to be unfeasible for me. Can I ask them to break the lease and then get them to pay increased rent, given I’ll be operating at a loss if I don’t?
Answer: Let’s break down the issue. The amount of money you make as a landlord mostly depends on how much rent is left over after expenses, mortgage payments and taxes. Your rental income is your main source of profit, but you can also make money if your rental property appreciates in long-term value, as this will increase your equity invested in that property.
Lenders use a rental affordability calculation to determine how much you can borrow and whether they think your buy-to-let mortgage is viable. When assessing your affordability, buy-to-let mortgage lenders will base your loan on the expected rental income of your property.
For basic rate taxpayers, lenders require that the monthly rental income be at least equal to 125 per cent of the monthly mortgage payments on an interest-only basis (with landlords commonly opting for interest-only mortgages). The lender will use an interest rate of 5 per cent for its calculations, known as a “stress test”, i.e. a rate will be chosen to show you can afford the mortgage if rates go up. For a higher rate taxpayer, lenders will often ask that the monthly rental income is at least equal to 145 per cent.
If you have long-standing tenants, increasing rent will be inevitable at some point of the tenancy to cover your costs such as the mortgage. Although you have the right to increase the rent, there are rules and regulations regarding rent increase that limit the amount by which you can increase the rent and the frequency of rises.
There are typically two different types of tenancy in the UK that will determine when you can increase the rent.
A fixed-term tenancy is agreed from the outset, which means you can’t increase the rent until the contract ends unless the tenant agrees to a rent rise mid-term. It may be worth checking if you also have a rent review clause, particularly if you did not draw up the tenancy yourself but rather with the help of an estate agent.
The second scenario is period tenancies, which are on a rolling basis, typically month by month. With this type of agreement, you cannot increase rents more than once in a year.
Landlords can typically issue a Section 13 notice to raise the rent, but cannot do this while a tenant is on a fixed-term contract.
So your options appear to be:
- Wait until the existing fixed-term tenancy ends and issue a new contract with revised rent.
- Agree on an increase with your tenant and sign a new contract noting the change. However, it would be unlikely that the tenant would agree to a significant increase before they have to, given they signed an agreement on price in their contract
The key point with any option is that you provide the tenant as much notice as possible. This will give them sufficient time to review their options, but also allow them to compromise, meaning you avoid losing a long-standing tenant.
