Landlords respond to higher interest rates by raising rents

Following the MPC’s second increase in interest rates this year and the fourth since last summer, landlords are responding by increasing rents by more than CPI inflation and by adding to their portfolios of buy-to-let properties.

Average rents on a typical buy-to-let property have risen by 6.5% over the past quarter, from £9,942 in January to £10,591 in April, according to the May edition of Paragon’s Buy-to-Let Index. This compares with an increase in CPI inflation over that period of less than 1%, even taking account of last month’s sharp rise in inflation, prompting Mervyn King’s first ever open letter to the Chancellor.

Nigel Terrington, Paragon’s chief executive, says: “With demand for rented accommodation as strong as ever, landlords are able to increase rents on existing tenancies when they are renewed and apply a higher rent to new tenants than they would have charged previously. Despite house price rises, rental growth is supporting yields at above 6%, a level that has been stable for the last year.

Independent research, conducted on behalf of Paragon, confirms both investors’ confidence in the private rented sector and their intention to continue to grow their portfolios. Over 30% of respondents indicated that they were reacting to rising interest rates by increasing rents, and 12% said they were investing in more buy-to-let property. Many landlords are comfortable with their portfolios as they stand, with 43% taking no action specifically on the back of the interest rate rises.

“Rising borrowing costs are not perceived by investors as a negative factor. The majority of our landlords are not exposed to short term interest rate fluctuations, as more than 70% of our recent buy-to-let borrowers chose fixed rate products. Our experience shows that landlords finance their property holdings through a combination of equity and debt, typically in the ratio 35% cash, 65% borrowing, which mitigates the impact of rising interest rates.”