What Do Rising Interest Rates Mean for Tenants?

What do rising interest rates mean for tenants?

When people talk about rising interest rates, they often first think of mortgages, homebuyers and owners. For tenants, the effect is more indirect. Higher interest rates can increase owners’ financing costs, change investors’ return calculations and add further pressure to the rental housing market.

In existing tenancy agreements, however, landlords cannot simply demand higher rents at will just because interest rates have risen. In Switzerland, tenancy law rules, formal requirements and specific calculation bases apply.

The key point is therefore to distinguish between three levels: the general interest-rate environment, the mortgage reference interest rate and the specific rent basis of the individual tenancy agreement.

Reference interest rate: the policy rate is not directly decisive

The SNB policy rate influences the interest-rate environment, but it does not affect existing tenancy agreements one-to-one or immediately. For rent adjustments based on changes in mortgage interest rates, the mortgage reference interest rate is decisive in Switzerland.

The reference interest rate is based on the average interest rate of domestic mortgage claims and is rounded to the nearest quarter percentage point. Because existing fixed-rate mortgages are also included in the calculation, the reference interest rate usually changes more slowly than the policy rate.

When can rising interest rates lead to a rent increase?

A rent increase due to rising interest rates is mainly possible if the reference interest rate has risen compared with the previous rent basis. If the reference interest rate increases by 0.25 percentage points, the net rent can generally be increased by 3 percent.

However, this does not mean that every announced increase is automatically correct. The starting basis, calculation, inflation, cost increases, possible cost reductions, type of contract and formal notification are decisive.

Which factors can additionally influence rent?

The reference interest rate is central, but it is not the only factor. Inflation, maintenance and operating costs, fees, insurance, administration costs or value-enhancing investments can also play a role in a rent adjustment.

Conversely, tenants can check whether certain costs have fallen or whether the increase appears excessive. Particularly important is whether the new rent leads to an excessive return or no longer corresponds to what is customary in the locality or neighbourhood.

Why rising interest rates can add pressure to the rental market

Rising interest rates can mean that fewer households are able to buy a home or that they postpone a purchase. These households remain in the rental market for longer. This can increase demand for rental apartments.

At the same time, higher financing costs and construction costs can make new housing projects more difficult. If less is built or projects are completed later, the rental housing supply remains tight.

What rising interest rates mean for landlords and investors

For owners, landlords and investors, rising interest rates can make financing more expensive. This can create pressure to partially offset higher costs through rents, ancillary costs or future asking rents.

At the same time, higher interest rates change return calculations. Some investors become more cautious, buy less or postpone projects. Others hold on to real estate because they seek stable long-term rental income, tangible asset protection and good locations.

For tenants, this means that the effect of rising interest rates is not the same everywhere. In a tight market, housing costs can continue to rise even if investors become more cautious. In regions with more supply, the effect may be significantly smaller.

Existing tenancy agreements: pay close attention to the starting basis

For existing tenancy agreements, not only the current reference interest rate is relevant. It is important to know which reference interest rate the current rent is based on. This information can often be found in the tenancy agreement or in the last notice of rent adjustment.

If the current rent is already based on today’s reference interest rate, an unchanged rate does not create a new claim for an increase or reduction. If, however, the rent is still based on a higher reference-rate basis, a reduction claim may exist depending on the situation.

Tenants should therefore check the starting values used in every notice: reference interest rate, index level, cost basis, ancillary costs, reservations and any investments.

New tenancy agreements: rising interest rates work differently

For new tenancy agreements, the situation is different from existing tenancies. Asking rents are more strongly influenced by the market, demand, vacancy rates, location, property quality and willingness to pay.

If rising interest rates make buying more difficult, rental demand can increase. In tight regions, this can lead to higher asking rents. In regions with more choice or weaker demand, the effect may be much smaller.

Anyone looking for a new apartment should therefore compare not only the rent, but also ancillary costs, termination periods, rent basis, reference interest rate, type of contract, indexation, stepped rent and planned renovations.

What can tenants do if they receive a rent increase?

If a rent increase is received, tenants should first remain calm and check it systematically. The official form, justification, delivery, termination date, calculation and objection deadline are important.

An increase may be problematic if it is not issued on the official form, is unclearly justified, uses incorrect reference interest-rate levels, does not clearly separate several reasons or was not delivered in due time.

Anyone who disagrees with the increase can object to it within 30 days of receipt at the competent conciliation authority. If uncertain, an early review is worthwhile, because missed deadlines can result in the increase becoming effective.

Step by step: How tenants should assess rising interest rates

1. Check whether a formal rent increase has actually been issued.
2. Check whether the official form was used.
3. Check delivery date, termination period and next termination date.
4. Find the previous rent basis in the tenancy agreement or last adjustment.
5. Consider reference interest rate, inflation, cost increases and ancillary costs separately.
6. Request a calculation if the justification is unclear.
7. Note the 30-day deadline for a possible objection.
8. If uncertain, contact the conciliation authority, tenants’ association or a legal specialist.

Template text: Request calculation of a rent increase

The following text can serve as a template and should be adapted to the specific case.

Subject: Question about the announced rent increase

Dear Sir or Madam,

I have received your notice of rent increase for the apartment at
[address].

So that I can review and understand the adjustment, I kindly ask you to
provide a detailed calculation of the increase. In particular, please provide
information on the following points:

- previous reference interest-rate basis of my rent
- current reference interest rate applied
- inflation and index basis taken into account
- claimed maintenance and operating cost increases
- any value-enhancing investments
- effects on net rent and ancillary costs
- date from which the new rent is intended to apply

Thank you for your reply.

Kind regards,
[name]

Practical examples

Checklist: Checking rising interest rates and rent

Frequently asked questions about rising interest rates and rents