If you’ve decided that moving into the world of property rentals is something that appeals to you, you’ll need to make sure you are fully up to scratch with the rules and regulations surrounding it. One common question is whether you can rent your house out on a residential mortgage. The simple answer is yes, you can, but it comes with some particular terms and conditions. It’s not as simple as letting someone rent your home. From informing your lender, to potentially switching mortgage products, renting a house out on a residential mortgage can have varying levels of complexity. In this blog, we’ll explain all.
Can I rent my home out on a normal mortgage?
If you want to rent your home out on your normal residential mortgage, you might well be able to. But it would only be for a specific period of time. Lenders can grant what is known as “consent to let” where you are allowed to rent your house out on a residential mortgage for a specific amount of time. In many cases, this is about a year. Should you be looking for your house to be a permanent source of rental income, you’ll have to switch to a buy-to-let mortgage.
Do I have to tell my lender before I rent my house out on a residential mortgage?
Yes. If you don’t you could find yourself in breach of your agreement and this could prove costly. You’ll need to let them know if you plan to let the home out permanently or whether it is just for a specific period. Should it only be a temporary rental, you may, as we mentioned above, be granted “consent to let” but be aware, they may not grant that consent. If they do, they may also add certain caveats to your existing mortgage deal.
Should you wish to make the home a permanent rental property, they will require you to switch to the buy-to-let mortgage.
If you do not inform your lender, you could be investigated for mortgage fraud, and this could see you penalised and having to pay back the entire balance of the mortgage. In addition, your credit score could be severely affected, denting your chances of a new mortgage in the future.
Putting it simply, ask the lender for permission or run the risk of an expensive penalty.
What is consent to let?
You’ve seen us mention consent to let a few times now, let’s clarify what it is. Should you own a home and wish to rent it out you may be granted consent to let. This is where the lender is happy for you to rent out your home for a specific period under your residential mortgage. It isn’t all plain sailing though. The lender may charge for this to be added to your mortgage or may alter the interest rate. Some lenders view it as their loan being put more at risk if someone other than the original mortgage applicant is living in the property.
Getting consent to let isn’t always straightforward though. Certain lenders have particular criteria you need to meet. This may include:
Equity: Some lenders will only be willing to grant consent to let if you have a specific amount of equity in the home. This could be as high as 25%.
Time with the lender: Some lenders may reward loyalty a little more favourably. If you have been with the same lender for a year or more, they are more likely to grant consent to let.
Rental income: Even though you may have passed affordability checks initially, with new people living in your home, the lender may want additional proof that their loan repayments are safe. You may need to be earning a certain amount and/or demonstrate that the rental income covers the costs.
If you wish to let your home out for longer periods or are not granted consent to let, you’ll have to look at a buy-to-let mortgage instead.
A buy-to-let mortgage replaces your residential mortgage when renting out your home. Let’s take a look.
Switching to a buy-to-let mortgage from a residential mortgage
If you were not granted consent to let or wish to let your home out for lengthy periods, perhaps permanently, you’ll need a buy-to-let mortgage.
Buy-to-let mortgages are specifically set up for you to rent out your home and generate an income from it. Buy-to-let mortgages are a little more complex than residential mortgages so you may have to do a little more groundwork and save a little more cash to get approval for one.
How does a buy-to-let mortgage work?
A buy-to-let mortgage allows you to finance the purchase of a home just like a residential mortgage does. The only difference is that you’ll not be living in the home you are paying for.
The application process for a buy-to-let mortgage is similar to a residential mortgage in as far as the lender will want to do several checks on income, identity, credit history and more. In addition, though, they will look at your projected rental income and normally expect it to be 125% of your mortgage payments.
This helps protect the lender should there be times when the property is vacant and ensures that the rent covers the mortgage sufficiently.
Another difference to residential mortgages is the deposit. With a buy-to-let mortgage, you’ll likely need 25%, perhaps more. It is not uncommon to see 40% or higher requested.
The interest rates. The bane of all loans will also need to be considered. With a buy-to-let mortgage, interest rates are higher than those found on residential mortgages. This is partly because the lender sees greater risk in lending you the money to pay for a house someone else is living in.
Finally, buy-to-let mortgages are often interest-only. Where residential mortgages allow you to pay back part of your capital debt and part of the interest, buy-to-let does not. Instead, each month you make payments on the interest, and then at the end of the term, you pay back the capital. To find the right .buy-to-let mortgage for you, it would be advisable to speak to a buy-to-let mortgage broker. That way you can navigate the minefield of options and find what suits you best with expert guidance.
Can I rent my home out on a residential mortgage if I’m still living in it?
Yes. You’ll be known as a “self-letter”. You will have to get consent to let from your lender to be able to do this and, as we were referencing earlier when talking about consent to let, it can only be for a short period.
Do I have to get specific insurance if renting my home out on a residential mortgage?
It varies. Some insurers may want to alter your policy a little, others may request you obtain landlord’s insurance. With a buy-to-let property, landlords insurance is essential.
These policies will normally cover such things as loss of rental income, damage caused by tenants, legal expenses for tenant/landlord disputes and more.
Will I have to pay extra tax when renting out my home on a residential mortgage?
If you have been granted a consent to let and you remain living in the home, you aren’t classed as running a business as such. However, how much you earn through the rent could mean certain tax rules need to be followed.
You’ll pay income tax at your nominated rate meaning if your income plus the rent takes you into the higher rate tax bracket then you will pay the higher rate of tax for all the income above the higher rate minimum threashold, but should you rent out a fully furnished room in your home you may be eligible for rent-a-room relief. This applies when your income from the furnished rental is less than £7,500 per year and gives you a 10% reduction.
It would be advisable to seek professional guidance from a tax expert first though as tax rules can change frequently and what you may be eligible for today may not be available tomorrow.
https://mortgagesavingexperts.com/Mortgages are never simple and that is why we are here. With years of experience and a friendly knowledgeable team on hand, Mortgage Saving Experts help you find the right mortgage for your property plans. Whether venturing into renting property and need to move from a residential mortgage, or are in the hunt for a first time buyer mortgage, we can help. Simply get in contact today to enjoy fee-free mortgage help.
