All regions of the UK see a year on year rise in residential rents
Following on from the good news reported earlier in the week regarding the rise in House Prices it seems rents are also on the rise.
Rents in the UK have continued to increase steadily throughout the year with the average rent in the third quarter of 2014 reaching £903 per calendar month, according to the latest index.
This is an increase of £21 per calendar month, up from £882 per calendar month in the second quarter of 2014. In September, the average UK rent increased to its highest level for 32 months to £916 per calendar month, a growth of 5.2% year on year.
All regions saw a year on year increase in rents apart from the Midlands, which saw no increase in the third quarter of 2014 while Greater London saw the greatest increase, up 9.8% on the third quarter of 2013, followed by the East of England which saw an increase of 7.3%.
The data also shows that arrears have remained relatively stable with many regions seeing a decrease and some seeing less than a 1% increase.
In terms of the size of properties, all properties saw an increase in rent quarter on quarter and year on year. Four bedroom plus properties saw the greatest increase in rent year on year, up 5.8% to £1,524 per calendar month, followed by three bedroom properties up 4.8% to £956 per calendar month. Two bedroom properties saw the smallest growth in rent, up 4.1% to £822 per calendar month.
Meanwhile in order to direct lenders as to how much buy to let investors are able to borrow, could mean that landlords in the South East and London will have to find a 40% deposit in order to secure mortgage finance.
The powers, if granted, will allow the Financial Policy Committee to ask lenders to stress test how much new landlords can borrow and ensure that the income landlords receive is greater than the interest payments on their mortgages.
Lending on investment property is typically secured against the rental income a landlord can generate. For most lenders, landlords are assessed on whether the rent generated from the investment property will cover 125% of the interest component of the mortgage.
This gives both the lender a degree of security against interest rate rises and takes into account the money a landlord will reinvest back into the property for general maintenance and improvements.
At present, the interest rate against which the borrower’s ability to meet repayments is at the discretion of the lender. Over the past two years, this rate has typically been around 5%, translating into 1.2% above the 3.8% rate at which the average landlord secures their loan.
For the average landlord who has purchased during 2014, the rental income from the property covered 205% of the mortgage interest, well inside the 125% limit. Tested against an interest rate of 5%, generally the rate which lenders currently use to test affordability means the rent will cover 165% of the mortgage interest.
The implementation of the findings from the Mortgage Market Review (MMR) has seen the ability of new owner occupiers to meet higher repayments tested at interest rates of up to 7%.
While powers have yet to be formally granted, the implementation of stress testing alongside a potential rise in interest rates, would see new landlords have to put in larger amounts of equity to obtain mortgage finance.
Stress tested against an interest rate of 7%, in similar fashion to owner occupiers under MMR, a third of new mortgaged investors would have to increase the amount of equity they put down, amounting to an additional £40,000 on average.
‘Stress testing of new loans for investors has the potential to increase the entry barriers for would be landlords. It will primarily affect areas in the South of the country and areas where yields are lower. ‘If the proposals are implemented, would be landlords will have to put down increasingly larger deposits to meet more stringent lending criteria. The high value nature of parts of London and the South East mean many landlords will find themselves having to put down deposits upwards of 40%. While lenders need to ensure repayments are affordable to the borrower, they must ensure they strike a balance between affordability and viability,’.