As the Renters Reform Bill works its way through parliament there should be much to engage advisers’ landlord borrower clients, and a lot of change to come.
I saw some recent research which suggested landlords are much more concerned about rental arrears and void periods than they are about the forthcoming reforms and that is understandable given those reforms have not yet been introduced, with the legislation now anticipated to complete before this summer.
However, given the majority the Labour Government has and the fact it is fully invested in these reforms, landlords are going to need to be considering the impact these changes will have on their ability to increase rents, in particular, certainly by Q3 this year.
And those impacts are sizeable, in terms of having to adhere to an only once a year rental increase, which must be provided on an official Section 13 notice, and must be provided two months in advance.
Plus, the rather significant fact that rental increases can no longer be above and beyond what has been determined as the ‘market rate’. If tenants believe any rental increase is beyond this, they can complain to the First Tier Tribunal who will assess whether the suggested rental increase is in keeping with the market rate.
And, they can of course determine that it may not be. Plus, while the Tribunal ruminates on these decisions, any rental increase is put on hold. If the Tribunal agrees with the rental increase, that will only kick in when the new tenancy is agreed and won’t be backdated to the point when the landlord originally wanted the rental increase to come in. Also, the Tribunal will not be suggesting a further rental increase if the one suggested by the landlord is below the market rate.
I suppose this is why the Government wants tenants to be informed two months in advance, because presumably it believes this gives time for the tenants to reject this, to complain and for the Tribunal to determine its adjudication. The big question will be whether two months is enough time to do this, especially given the likelihood it is likely to be seeing a large number of cases.
You might even argue that it’s worth every single tenant taking their rental increase case to the Tribunal, as the worst that can happen is that they have to pay the increase in the future. Will the Tribunal be resourced to cope with this? Who knows? It will certainly need to be.
I do wonder if it’s worth charging tenants a small fee to move cases forward as this is likely to put off any who are just complaining for the sake of it, rather than genuinely believing a rental increase is beyond the market rate. Perhaps the Tribunal will need to provide data to the market about ‘market rates’ in differing regions/types of property, etc, to stop superficial complaints at source?
But, what about landlords? Now, clearly for existing landlord borrowers who are still within any special term they have on their mortgage, rental increases of this nature are not going to impact on their ability to borrow – unless they are seeking to borrow more mid-term – or the size of their loan, etc, because that will have been assessed at the time of their last mortgage/remortgage.
But, in the future, for those wanting to purchase a new investment property and those wanting to remortgage, clearly the rents achievable – and importantly – what the market rate is likely to be, is going to impact on affordability, specifically interest coverage ratios.
Part of me wonders whether these new rules have the potential to skew the market somewhat. For instance, while tenants might believe they should always complain against a rent rise, what about landlords who might believe they are currently charging below market rate.
There will be plenty of tenants currently benefiting from a situation where rents are not at ‘market levels’, the landlord happy to keep them lower because the tenants are good, they don’t want a void period if the tenants decide to leave, and they are currently happy with the rent in terms of what it covers and the profitability it generates.
MARKET RATE MOVEMENTS?
But, looking ahead, won’t rents merely move to the market rate whatever their current level? If landlords – and letting agents – are able to see what the market rate is, then wouldn’t it make sense to move them to that level every single year? And if they are already beyond the market rate, then it’s clearly going to be in their best interest not to suggest an increase. Far better to sit where they are, getting more than the market rent. After all, the tenant can’t complain about an increase that hasn’t been served.
In that sense, it’s going to be very intriguing to see what the Tribunal determine market level rents to be, and what they are going to be willing to allow them to rise by each and every year. What level of inflation will it use to determine this? Is it going to need to provide a property by property assessment? Even doing it street by street won’t really cut the mustard, as there will be different types of properties, different types of tenancies, etc, in each house or flat. Will an automated approach work given the vast differences between properties?
Overall, at the very least, advisers should be communicating with their existing landlord borrowers – and those new clients they see – regarding what is coming over the horizon. Any point of contact, or communication, is good for the overall relationship and shows they are in the know and wanting the client to think about the future. It also may give them an excuse to discuss future financial options and other services at that point.
I would also suggest that landlords communicate with their letting agents about how they are likely to approach this – what evidence might they need to provide to the landlord to show why the increase they would like to introduce isn’t a market level, for instance?
As mentioned, the entire sector is merely months away from what could be a seismic change and forewarned is certainly going to be forearmed when it comes to these changes.
