Struggling to sell in today's difficult property market? You could rent out your home instead.
It is becoming increasingly difficult for homeowners to sell their homes in today's uncertain market.
According to property valuation agency Hometrack's latest index, properties are taking, on average, nearly ten weeks to sell. That's the longest period in seventeen months. What's more, sellers are only managing to achieve 92.4% of the asking price, the lowest level since September 2009.
As a result, many of those who would like to sell are instead looking to rent out their properties. Is this a smart thing to do?
There are sound financial reasons to let your home as well.
The rates on residential mortgage deals are much lower than buy-to-let deals. And, as a former occupier of the property, some lenders will allow you to stay on your current, residential mortgage deal for as long as it lasts. Others will charge you a nominal fee.
If you're currently a borrower with one of these lenders, your mortgage payments should be much cheaper than if you were a professional landlord. And you won't need to prove the rent can meet the mortgage payments, as you would with a buy-to-let mortgage.
However, other lenders look at the matter on a case-by-case basis and may refuse to consent. This means you could be forced to remortgage to an expensive buy-to-let deal, potentially incurring penalties as well for redeeming your mortgage early.
John Fitzsimons looks at how to work out what offer to make on a property.
To avoid this risk, you may be tempted not to tell your lender you are renting out the property. Unfortunately, you are legally obliged to do so. You must also ask for a 'consent to lease'. If you do not inform them, you are in breach of the conditions of your mortgage contract, according to the Council of Mortgage Lenders, which claims lenders are "very likely to charge you retrospectively a higher rate of interest".
Be sure to read Rent out your home as a buy-to-let for more on what you need to do before you can start renting out your property.
And remember, it is absolutely vital that you inform your buildings and contents insurance provider, as otherwise any loss or damage caused by the tenant to your property or to others' property may not be covered.
Capital Gains Tax
You normally have to pay Capital Gains Tax (CGT) when you sell a property which is not your private residence.
However, you don't have to pay CGT on a property you have lived in, if you sell it within three years of moving out.
And, even if you sell it after those three years are up, you would qualify for letting relief. Get ready for some jargon - the relief you'll qualify for will be the lower of the gain related to the letting, the amount of private residence relief you're getting, or £40,000. Confusing right?
How do you work out 'the gain'? This is extremely complicated, but here's a simplified explanation:
1. Figure out the difference between the price you bought the property for and the price you sell it for. That is the overall gain.
2. Subtract the cost of any home improvements you have made during this time.
3. Work out the proportion of time you have let it, in relation to the amount of time you have owned the property. Then divide the overall gain appropriately.
For example, let's say you have owned the property in your sole name for 20 years and let it for the final eight years. For the final three years it was let, the property was still classed as your private residence - so, for tax purposes, you can subtract these three years from the eight years you have let it.
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That means, for tax purposes, you have actually only let the property for a quarter of the time you have owned it (in this case, five years out of the twenty). So if you made £100,000 profit on the property, £75,000 of that gain would be classed as tax-free. In fact, the remaining £25,000 would also end up tax-free, given that it ends up as the lower figure of the gain related to the letting (£25,000), the amount of private residence relief you're getting (£75,000) or the somewhat arbitrary figure of £40,000.
This can all get pretty confusing, so it's worth making use of a chartered accountant for a bit of guidance.
Of course, there are drawbacks. Renting out a property instead of selling it will not be the best strategy for everyone.
For example, if you are planning to buy a new property, you need to be sure that:
- you don't need to sell your current home in order to put down a deposit on your new home. Remember, mortgage rates have increased recently and you could struggle to find a deal at an affordable rate without a decent deposit.
- the money you receive in rent will cover the mortgage payments on at least one of the properties you will own; or you have enough surplus income to cover any shortfall.
Remember that you will have to pay income tax on your rental income at whatever rate you currently pay, and that you will need to be able to pay for repairs on the property, as well as keep up the mortgage payments when the property is empty between tenants.
Furthermore, as a landlord, you have to ensure the property complies with safety regulations and certain legal requirements. For example, you must:
- Fit smoke alarms and extractor fans
- Have gas appliances inspected by a CORGI-registered engineer
- Ensure upholstered furniture is fireproof
- Register with the Tenancy Deposit Scheme
- Find out whether you need a House In Multiple Occupation licence.
Still, despite all the hassle and drawbacks, if you are struggling to sell your home right now, you could find renting it out instead is just the solution you were looking for.
This is a lovemoney.com classic article originally published in May 2008 and updated.
At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email firstname.lastname@example.org for more help.
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