Find out why it would be a terrible mistake to fail to inform your lender if you let out your home .
When property prices slumped in 2008 many wannabe sellers decided to rent out their homes for a while.
These ‘accidental landlords’ felt it was a better option for them than to sell up for a lower price than they were happy with. Better to give the property market chance to recover and then sell.
There are other categories of accidental landlords too, from career break travellers who want to let their home for a year while they explore the globe, to those who have been made redundant and offered work in another part of the country. While they may want to take the job, they may also opt not to sell the home, and let it for a year or two instead.
The number of people choosing to temporarily rent out their property has increased massively in the last few years but those who simply move out, move someone in and start receiving the rent could be making a big mistake.
Change of circumstances
It’s vital you tell your lender if you let your home.
Your lender has assessed your ability to afford your mortgage based on your income and outgoings. If you move elsewhere and let out your home those changes may affect your ability to repay your mortgage (positively or negatively).
Arrange a mortgage over the internet.
Plus there is increased risk to the property (the lender’s security) if there is an unknown third party living in it. All in all, the basis on which you applied for the mortgage has changed and they need to double check the new information.
It’s essential that you contact your lender about this, rather than just hoping they never find out. After all, won’t you want to change your postal address to avoid all your financial details being posted to your tenant? That might ring a few alarm bells at the lender!
Plus if your tenant stops paying their rent or moves out, have you thought about how you could afford the mortgage in addition to the rent on the place you are really living in. If you fall behind on your mortgage and the truth comes out, you may not be dealt with as sympathetically as if you had informed your lender in the first place.
Finally - and frankly, most importantly - going ahead with letting the property breaches the conditions under which you took on the mortgage. Read the smallprint; it will be there!
How will the lender respond?
In the worst case scenario they may say you need to transfer your mortgage to a buy-to-let deal, which will probably be more expensive than your current mortgage.
Not only does this depend on your lender, it depends on your loan-to-value ratio and payment history, as well as the amount you have borrowed in relation to your income.
In the past this wasn’t too much of a problem because buy-to-let deals were virtually as cheap as residential mortgages. Now that is absolutely not the case.
Alternatively, they may ask you to apply for a ‘consent-to-let’.
This usually, but not always, allows you to keep your existing mortgage deal. The lender may ask for information on why you have decided to let your property, how long you expect it to be let for and how you plan to pay for it -- for example the expected rental income. You may need to prove it with a signed shorthold tenancy agreement.
Every lender has its own policy on whether it will give you a consent-to-let and you will have to check with yours to find out about any restrictions. But common things to look out for are:
- The lender may charge you for consent-to-let. For example Northern Rock charges £250 if you let out your home for more than a year while Santander’s charge is £295. There’s no charge with Nationwide.
- The lender will probably look at your case on an individual basis. This is what Santander does, though it says that most requests are granted. With Nationwide you need to complete an application form -- and additional information may be required, again depending on individual circumstances.
- Some lenders may ask you to come into the branch for a face-to-face discussion. They basically want to know if you have a valid reason for needing to temporarily let the property and that you are not a buy-to-letter trying to get away with a residential mortgage rate.
- It may be declined. Nationwide says it might decline consent-to-let if your mortgage is in arrears, in which case the arrears would need to be cleared before consent-to-let is granted. Northern Rock says it requires the rental income to meet 120% of mortgage repayments (on an interest-only basis) plus any unsecured borrowing. And Halifax points out that if the customer is letting from choice for an indefinite period, typically they are limited to similar criteria as applies to buy-to-let mortgages. Consent may also be declined if you don’t have sufficient equity in your home -- Northern Rock requires 30% for example.
- You might be able to keep your existing rate (with Nationwide, Santander, and Cheltenham & Gloucester for example), or you might have to move to a different product, as is the case for Halifax customers who must move onto specific consent-to-let rates. It’s worth pointing out that where borrowers are asked to move onto a new rate, that rate is usually higher than their existing residential deal.
Getting harder?
Some reports have suggested that it is getting harder to obtain consent-to-let.
In fairness, it makes sense that lenders would currently look closely at changes to tenure, in the same way they scrutinise new customers more tightly than they did pre-crunch. If they were allowing consents-to-let willy-nilly in the aftermath of the recession, they would be accused of acting irresponsibly.
For the record many of the big lenders -- including Santander and Nationwide -- haven’t actually changed their consent-to-let policy in the last two years.
What has changed though is the number of people looking to get this consent, given the rise of accidental landlords. Unfortunately many affected borrowers are often strapped for cash so a hefty administration fee can smack of profiteering when they are trying to find a way to continue paying their mortgage. Indeed £200-plus fees do look a little steep in anyone’s book.
Lenders are stuck between a rock and a hard place here and I think they are right to look closely at the changing circumstances of their borrowers, but let us know if you disagree. And tell us if your lender has a different policy to those mentioned.
Finally, remember your other obligations as a landlord. Contact your buildings insurer to tell them of the change or risk your cover being invalidated; check what tax you need to pay on your rental income; get an Energy Efficiency Certificate and have an annual gas safety check; and keep your tenant’s deposit into an authorised tenancy deposit scheme rather than simply into your bank account.
Accidental landlord or not, you still need to abide by the rules.