Interest rate rise and renting

[Kona84]

I know that mortgage rates will be rising and those unlucky not to have a fixed rate will likely struggle, but as a renter I’m equally as worried.
I am not privy to my landlords financial situation - I don’t know if they have a fixed rate. I don’t know if my already high rent will be increased even further.
I imagine that with todays rent prices that landlords are making enough to pay the rent and a nice living .
but if interest rates start eating Into their profit they are gonna raise rent right? And unlike mortgage rates when hopefully this all settles they are probably unlikely to reduce rent again.

am I being too negative?
are you a landlord? What are you doing about the interest rate rising?

I'm a landlord. The mortgage was fixed for 5 years but I'm not sure how long it's got left on the fix. I just put the rent up which we don't do every year. I'm not intending to put it up by more than 10% a year and only if that's absolutely nessary.

Looking at market rents I'm 10-20% under market rate so I think we are in a mutually safe place right now, me and Tennant.

If shtf we would have to sell but right now the mortgage would need to go up 150% to get near thinking about that. I'm not overly worried as I don't need a big profit. I just need to cover costs. This isn't a money maker it's a long term profit on sale type project.

However I'm 18 years in. It's all quite stable but who knows what the future holds really?

So basically I'm not planning on changing anything. I'm not going to pass on tiny incremental rises. If we get to 20% I think everyone will be in trouble but I planned for 10% it's always been a possibility.

The rental market won't bear the same relationship to interest rate rises as mortgages, even though landlords would dearly like them to and many will still be too dumb to realise they invested all of their life savings into a high risk asset that doesn't always yield a profit. That's not to say you won't have problems, only that the way they materialise might not be as you would initially expect.

Two facts about the UK rental market you need to understand:

1. Landlords can only charge what people can afford to pay.

2. But there are not enough rental properties to meet demand (mainly because of the number of second homes and investment properties owned by people that don't actively seek tenants).

The way that plays out, they rent out to the highest income renters and charge those high income renters as much as they can. Those on lower incomes either have to house share or can't afford rent and have to sofa surf/are left homeless.

The trouble is, through greed, landlords have already maxed out how much those highest income renters can afford. Where I live, which is nowhere special, you would need to pay around £900 a month for a two bedroom flat which is still more expensive than having a 90% LTV mortgage on the same property with interest rates of 5%. So landlords cannot tap those people up for any more, there's nothing left to give.

Also, interest rates are likely to cause a house price drop of around 10-15% next year which will help some of those highest income renters onto the housing ladder themselves, because the mortgages will still only cost the same as their rent.

What we don't know is how many people will be forced off the housing ladder and how much they are earning. Either they could enter the rental market with even more money to spend on rent (which I find unlikely) or they will come off the ladder with similar incomes and compete for the same limited number of properties (much more likely). So you might find rents can't rise much but it is very hard to get a rental property unless you are quick.

The other issue and the one that I think will be the most prominent will warm our hearts but also be a problem in the short term. Landlords are going to start selling up or (for the really over-leveraged) going bankrupt. That could mean more and more properties sitting empty and in the hands of bankruptcy courts rather than being rented out, further restricting supply.

You might not be able to find anyone who can afford to rent your property at a level that covers your costs. Welcome to landlord reality, something we haven't seen in the UK for a couple of decades.

PS: I've been telling people property is a risky investment. Congratulations, you're about to find that out the hard way.

No, it was something I was thinking about earlier. Some landlords might have two mortgages increasing, surely this will lead to rent rises or selling? We are so fortunate that we 'rent' off a family member. We used to just rent from a private landlord and when I made the decision to do this I felt guilty as I have crammed our family into a much smaller house. The reasons we moved were't all financial but I am so glad we did.

Our plan is eventually to buy but God knows when that will happen.

They might sell. They can only increase the rent if there's a market for it, which there isn't because the market has already screwed as much rent out of people as possible. Who exactly is going to have the money to spend the extra £200-400 a month? Landlords who thought it was easy money are going to get a reality check when they lose 10-15% of their capital and their yield slumps because the market rent doesn't pay enough to cover the mortgage anymore.

@BetterFuture1985 this future you're looking forward to where landlords lose everything isn't going to be rosy for anyone else either. What's bad for landlords is bad for other home owners and the economy generally.

About 1/3 of landlords own outright so no problem for them, another 1/3 have loans less than 50% of the purchase value of their properties so not such a problem. As a tenant I'd hope to be renting from either of these groups. The final 1/3 have 50+% LTV so are in a more precarious place.

People will lose their homes which is very sad whether renting or buying.

I'm neutral on whether I "want" it to happen or not. I just don't feel inclined to care about landlords who took stupid risks and then lost money because of said stupid risks.

Hopefully we'll have a government that helps out mortgage lenders on their residential property but tells landlords to go to hell. That's what should have happened in 2008 instead of cutting rates in the first place.

OP, it's hard to predict what your particular LL will do - not only because you aren't aware of their financial situation, but also because you might not be aware of their decision-making process. It isn't always the case that LL will increase rent in order to maximise short-term profits.

Agents tend to push LLs to increase rent because their fees are a percentage of rent. Agents don't care that this may not be in the LL's overall best interests. So what if the tenants leave? The agent can then charge money for all the extra work involved at changeover. Landlords don't necessarily question the agent's advice. So if your LL doesn't use an agent, the landlord might take a different approach.

From a landlord's point of view, good stable tenants are a huge asset. If you have been there for some time, paying rent reliably and not trashing the house, and you appear to be in a secure financial position, a sensible landlord will want to keep you. Changing tenants is expensive. Finding oneself with a "nightmare tenant" is hugely expensive. I won't increase rent if it means losing my current good tenants.

At the same time, it could be unwise to hint to your landlord that you're struggling with the rent and that you might leave if they put it up by much. If they perceive you are in financial difficulty and there is a risk that your bills may overwhelm you so you become unable to pay the rent, they might just decide to get the ball rolling on pushing you out now so they can try to replace you with "safer" (=higher-income) tenants.

Personally, I do plan to increase rent this year, but only by a modest amount (3%). I hope my tenants will stay for a long time. It isn't viable to leave their rent unchanged over many years, especially with high inflation. If I don't increase rent regularly, but instead wait and bump it up to current market level in say five years' time, they'll get a huge shock. They might be unable to afford that massive jump in rent (bad for them), plus it may well prompt them to leave (bad for me).

However, I realise that many landlords find the idea of raising their sitting tenants' rent so unpalatable that they never do so, preferring instead to wait until a change of tenants. Ironically, that can put tenants in a difficult situation. The landlord may end up hoping the tenants will leave of their own accord, trying to give them a nudge in that direction by allowing the property to fall into disrepair, possibly justifying it to themselves on the grounds that "tenants are getting cheap rent, so it's only fair". Meanwhile the tenants feel trapped in the bad conditions because they are used to the discounted rent and know that moving means a very big increase in their monthly outgoings.

So yes, it's complicated.