Homeowners who have chosen to rent their property risk finding themselves in hot water if they do not inform their mortgage lender of their decision.
So-called “accidental” landlords – landlords who have fallen into the business by accident – must be careful not to breach the terms and conditions of their mortgage by illegally renting a property.
Often, those expanding or moving in with a partner choose to keep their original property, leaving an empty apartment or house to rent.
Many of them will forget or simply don’t bother to tell their lender about their change in circumstances – and the results could be disastrous.
Am I breaking the terms and conditions of my mortgage?
Not informing your lender of your intention to rent a property could be financially ruinous. Technically, your mortgage provider could demand instant payment of the entire mortgage, which most homeowners couldn’t afford.
You must contact your lender and ask for a “consent to rent”, which authorizes the rental of the property for a limited period of time.
Although rental loans are generally more expensive than residential transactions, this does not always mean that your loan will immediately become more expensive. Many providers will give approval for the rest of your mortgage contract without raising the rate.
But consent to rent is only a temporary fix, and longer-term landlords are in a better position to transition from a residential mortgage to a buy-to-let version.
What is a rental property loan?
The terms included in most residential mortgages do not allow borrowers to rent the property and therefore a specific rental loan is required.
Banks and other lenders tend to view rental mortgages as riskier than their homeowner counterparts. The likelihood of gaps – the time when there is no rental income between tenants leaving and new tenants moving in – is high, which can threaten repayments.
The Bank of England led the charge to regulate the homeowners mortgage market more tightly and introduced tougher new affordability rules for homeowners in 2017. These changes, along with a punitive tax overhaul, have pushed hundreds of thousands of owners to leave the market.
In general, rental mortgage rates are higher, sometimes up to 1 percentage point. This will of course increase the monthly payments.
However, Aaron Strutt of Trinity Financial, the brokers, said the potential downsides of being trapped make a buy-to-let mortgage worth choosing if your plan is to rent a property.
He explained: “Many fares are very cheap and the extra costs may be worth paying to avoid the potential black mark on your credit report if you are found to be breaking the rules. »
Historically, homeowners could record a portion of mortgage interest as a business expense, meaning it could be claimed as tax relief. But from April 2020 this has been replaced by a 20pc tax credit.
Can I buy a property to rent as a first-time buyer?
Most lenders will require a larger deposit for rental mortgages, due to their riskier nature, which may prevent first-time buyers from investing in the market.
Minimum deposits on this type of loan are in the region of 20-25%, but as with a residential mortgage, a larger deposit will result in better mortgage rates.
This type of borrower should also be aware that they will not benefit from the usual stamp duty exemption for first-time buyers if they buy a property in which they do not intend to live. But they will also be exempt from the additional purchase and rental tax rates, meaning they pay standard stamp duty on the purchase.
Is it illegal to rent your house without?
Renting out a property without the consent of the lender is considered a violation of the terms and conditions of the loan, effectively amounting to mortgage fraud. According to trade body UK Finance, this could allow the lender to demand immediate repayment of the entire loan.
Although this does not often happen in practice, in most cases the lender would have the right to do so.
Typically, the lender will agree to a change in terms. This may mean that the rate increases or that a limit is placed on the number of years the property can be rented out. You may also be charged administration fees of several hundred euros.
But will I get caught?
Many accidental homeowners believe that their lender is highly unlikely to find out, so the risk is worth it. However, banks and building societies have developed increasingly sophisticated methods of catching up with private investors.
Something as simple as a tenant returning mail sent to the property on your behalf by the lender could trigger an investigation and get you caught.
Telegraph Money has reported in the past that lenders use complex data screening methods similar to those used by HM Revenue & Customs to catch tax evaders. This would involve scouring the internet for clues that the property might be rented out.
This article is kept up to date with the latest information.
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