Will my rent increase if interest rates rise?

3 min Read Published: 04 Aug 2014

Will my rent increase if interest rates rise?Reader question: Will my rent increase if interest rates rise?

This is a really good question as talk about rising interest rates always focuses on homebuyers with mortgages. Here I discuss what influences rental costs and whether there is any correlation between interest rate increase and rental costs

What influences rental costs?

  • National economic landscape - in times of economic downturn it will be difficult to increase rents as more people become unemployed and those in work feel cautious about over-committing themselves financially, so may remain living with parents or share with friends
  • Local economic landscape - where the employment prospects in a certain area are poor there will be a downward pressure on rents as the local population either cannot afford to rent or are cautious with regard to their finances
  • Property location - rents tend to be consistent across the same property type in the same area, any rent too high will not attract a tenant easily
  • Property condition - renters are often fairly flexible regarding the specific location and are more influenced by the condition of the property, a poorly maintained property will be more difficult to maintain
  • Fear of losing a tenant - landlords will be reluctant to increase rents to existing tenants by too much as this may drive them to look for alternative accommodation leaving the landlord with any rental income at all until a new tenant is found
  • Mortgaged properties - although many landlords will fund their buy-to-let property by means of a mortgage it is very difficult for them to pass any mortgage increase on to their tenants as again this may encourage to find alternative accommodation, so an increase in interest rates will not normally have a direct impact on rental costs
  • Property improvements - any made to a property could warrant an increase in rent especially if the improvements are substantial such as an extension or a complete redecoration and upgrade
  • Demand and supply - rental markets are no different to other markets where supply and demand has an impact on rental levels. Areas of high demand will have higher rents than a similar area with low rental demand
  • Inflation - historically rents have generally increased in line with inflation and therefore have tended to rise slowly over time, whereas mortgage payments can go up and down in line with the prevailing interest rate

Whilst a rise in interest rates does not have a direct impact on rents over time high interest rates will tend to coincide with higher inflation, with rents usually following suit.