The rise of the rent-to-move landlord
Renting out your property and using the income to subsidise a second home is fast becoming a profitable alternative to the traditional `sell-up and move on' approach, as Robert Powell explains.
Putting your money in bricks and mortar is an age-old and somewhat overused phrase in the investment world. Yet as house prices stutter and pension annuity rates dive bomb, that’s increasingly what older, equity-rich property owners are doing. With a twist.
Rent-to-move – where a homeowner rents out their property in order to move – is on the up. This can be a practical way to side-step house price tremors and cash in on a booming rental sector in order to upsize, downsize or give your pension plan a shot in the arm.
But it’s far from an easy process and is certainly not right for everyone.
Put simply, rent-to-move (or let-to-buy as it’s also called) works by remortgaging your home a buy-to-let mortgage and renting this property out to tenants. From here, you can either rent out another home yourself, or use any built up equity that is released when you remortgage to put down a deposit for another property.
The problem is buy-to-let mortgages require large deposits - typically around 35% in order to get hold of the very best rates. So you’ll need to have built up a significant amount of equity in your home if you want to switch. As a result, rent-to-move is more appropriate for older homeowners who have paid off a large amount of their mortgage and now want to move and boost their pension plan with additional rental income.
As lovemoney.com's Felicity Hannah found out, high deposit requirements for buy-to-let mortgages make rent-to-move unsuitable for young couples looking to free themselves of low or negative equity.
Permission to let
It is possible to obtain a ‘permission to let’ from most lenders in order to hang onto your current residential mortgage and still get tenants in. However these are generally short-term solutions. You may find that, two years or so down the line, the lender forces you to move onto a buy-to-let deal or ups your rate. And if you haven’t built up enough equity by this point, you could be forced to sell.
Some lenders are also very cagey about taking on reluctant, accidental landlords – in other words, home owners that are forced into rent-to-move against their will. You may find terms and conditions restricting your planned move by requiring that you let out the property for a certain period of time before you are allowed onto a buy-to-let deal.
But despite these difficulties, you should never rent out your property without notifying your mortgage provider. Not only will doing this break your home loan contract, it will also invalidate your home insurance policies. The best plan of action if you are intending on renting-to-move is to speak to a broker and establish exactly what options you have.
No one should ever take a move into the rental sector lightly.
Obviously the location of your home will play a huge role in determining how easily you can let your property and the rental income you stand to make from such a move.
Figures from Zoopla.co.uk point to a regional gulf opening up. The property website looked at rental yields - the amount a landlord can expect to receive back in rent when compared to the property value and expenses - and found a clear north-south divide.
Liverpool emerged as the city with the highest average return at 6.6%, followed by Hull, Oldham, Coventry, Middlesbrough and Rotherham. Every city in the top 14 had a yield of 6% or higher, and – with the exception of Coventry – was located north of Birmingham.
Conversely, Cambridge registered the lowest average yield at just 4.3%. York is marginally higher at 4.5%, followed by Reading, Bristol, Norwich and London.
This divide is down to the impact of the recession on house prices, as Zoopla.co.uk Director Nick Leeming explains: “The towns where average rental yields are highest are typically in areas that have suffered most during the economic downturn. Property prices in these locations are relatively low on average, but this does not necessarily mean people can afford to buy them.”
However for those with large levels of equity, low average property prices in areas like Liverpool make remortgaging and renting-to-move easier, while strong rental demand also sweetens the deal.
“High unemployment rates and greater exposure to public sector austerity have both diminished people’s appetite to buy. And lenders still demand large deposits in order to secure mortgages. Given these factors it’s easy to see why, even in towns where average prices are low, there is enormous demand for rental property,” says Mr Leeming.
But on the negative side, a high level of unemployment does present the risk of rent defaults.
Universities can also bolster buy-to-let hotspots. Take Zoopla.co.uk’s table leader Liverpool. The city is home to three universities and has a student population of 50,000. This provides a static body of tenants for those planning on renting-to-move.
According to Knight Frank’s latest student accommodation index, total returns in this housing sector averaged 11.5% in September 2011.
Despite the strongest growth being observed in the capital – where returns have nearly doubled year-on-year to 15.1% in September 2011 – Knight Frank highlighted that regional towns with more than one university can prove to be the most lucrative.
But there are downsides to renting your property out to students. If you pick the wrong tenant and end up with an unruly, messy bunch you could find yourself out of pocket come the end of the contract.
Again, to avoid problems, it’s important to speak to local agents and consult with a mortgage broker. You can find full contact details for lovemoney.com’s fee-free brokers over at the mortgage centre.
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