Changes to Lettings Agency Fees: What You Need to Know

letting agent with house keys

In this year’s Autumn Statement, Chancellor Philip Hammond announced that the government would be introducing a ban on lettings agents charging upfront fees to tenants.

The thinking behind this is the fact that prospective tenants cannot ‘shop around’ for lettings agents. Tenants have to go through whichever agent the landlord has chosen to advertise the property with in order to rent the home they want. Whilst the average fees in the UK are around currently £300, some are as high as £700, particularly in London. This has led to concerns that these fees put an undue burden on renters.

Whilst this move has been generally welcomed by housing organisations, some landlords may understandably be apprehensive. By banning lettings agents from charging tenants, it is presumed these fees will be pushed across to landlords. This could add yet more to their costs in a year that has already seen changes to taxes and mortgages impacting rental income. Some have suggested this may lead landlords to increase rents to mitigate the affect, thereby removing any potential benefit to renters.

Estate Agent House

However the government believes that the ban will not only makes things fairer for renters, but that it will increase competition between lettings agents, which could ultimately present landlords with better deals. This in turn would help them to take on the additional fees without passing the cost onto tenants.

It’s wise, nevertheless, to break-down the costs in order to truly understand any potential impact.

  • According to LendInvest.com, average rents in the UK are £902 per month, with average yields at 5.00% last year
  • Landlords currently pay lettings agents 10-15% of their rental income for a full service management. This works out to approximately £95 a month, and brings the average annual yield to 4.47%.
  • If you divide the cost of fees currently paid by tenants (£300) across the year that would be a mere £25 a month extra. When you take this into account, average yields would be 4.33% – a change of just 0.14%.

Industry experts consider this relatively small increase in fees for landlords not to be a major concern. Nick Marr, co-founder of the TheHouseShop.com, says:

“The figures… show that even if letting agents are forced to pass on the costs of tenancy fees directly to landlords, it will not have a significant impact on the landlord’s overall yield and profits. In fact, the additional loss in returns could be as little as 0.14% when compared to the existing landlord fees structure.”

Focus on Scotland

Fears may be allayed further when consideration is given to a pilot study of this scheme that took place in Scotland in 2012. Campaign group Shelter commissioned an independent research study to assess the effects of the change on the Scottish rental market. They found that landlords there weren’t any more likely to increase rents than those in other parts of the UK, suggesting that they hadn’t felt adversely affected by the new system.

If you found this article useful, you may also be interested in What Does The Cut in UK Interest Rates Mean for Investors? and Buy-to-Let Boosted as Property Rentals Exceed Sales for the First Time Since the ‘30’s.