Are extended tenancies good news for landlords?
Posted on 28 February 2018
One of the country’s biggest buy-to-let lenders Santander has announced that it is now allowing its borrowers to to offer 36 month tenancies, up from a maximum of 12 months.
Apparently this is partially due to increasing pressure from government to encourage more flexibility in the sector and give tenants added security by allowing rents to stay at the agreed level for longer.
Those renting are finding that increases in both house prices and rental values are making it difficult to save for a deposit to get on the property ladder.
Frankly, I’m surprised that a lending institution was limiting its borrowers to 12 month contracts in the first place.
There are clearly pros and cons for both landlord and tenant in an extended tenancy agreement.
A longer agreement will mean that the landlord should be able to rely on a guaranteed rental income and not have to contend with regular void periods and letting fees.
The downside would be the inability to increase the rent in line with general rent inflation and this becomes more of an issue if rental values are increasing particularly quickly.
A longer initial term will give the tenant will have more certainty around their rent for a longer period, allowing them to budget more effectively, but signing up for a long tenancy will limit the flexibility to easily move home, which is something that many of those renting value highly.
When advising our landlords on agreeing to an extended tenancy, we first find out what their plans are for the property.
If a landlord is holding the property as a medium to long term investment and the rate of increase in rental values is relatively low, we would generally advise that an extended tenancy is a good idea. The potential loss of income in being unable to increase the rent is offset by the savings on letting fees and void periods.
If, however, rents are rising rapidly we would suggest a 12 month tenancy agreement should be the longest initial term to which a landlord commits. This is particularly true if a landlord is considering selling the property within a couple of years as the presence of a sitting tenant can, in some cases, reduce the sales value of a property.
The reason I am surprised that a lender was limiting their borrowers to offering 12 month contracts is that this seems like an unconservative approach from what are traditionally fairly conservative institutions. I would imagine that the security of having a guaranteed income for a longer term would outweigh any potential rental increases, particularly as any extra money generated by putting the rent up is likely to be retained by the landlord.
Lenders will, of course, have their own reasons for this limit, but longer tenancies generally increase stability and any increase in stability in the housing market can only be a good thing.
Our statistics based on our lettings in Belfast show that rents are continuing to rise, particularly in the apartment sector, but not quickly enough to confidently rule out a tenancy agreement longer than 12 months.
With rents rising the way they are, the decision on length of tenancy agreements really depends on the attitude and priorities of the landlord. Those who are more risk averse should opt for a longer agreement if possible, those who wish to maximise their yield and are prepared to accept some modicum of risk of extra expense to do so, should keep their options open with a shorter tenancy agreement.
If you'd like to discuss this in more detail please feel free to contact me, Steve McGuinness at email@example.com
You can also find out more about our award-winning residential lettings department here. https://mcguinnessfleck.com/lettings/