Can you rent out your home if you have a mortgage? The simple answer is yes, but you need to inform your mortgage lender of the change. Failure to do so could lead to dire consequences. Let’s take a look at what you need to do and how this could affect your finances.
Personal circumstances change. You may be moving in with a partner and not able to sell your current property yet, or you could be moving into new accommodation for your job but want to keep a presence on the property market. Whatever your reason for wanting to rent out your mortgaged property, the key thing that you need to do is ask your lender for ‘consent to let’.
If you fail to do this, and are found out, then you will be in breach of the terms and conditions of your mortgage. Your mortgage was given on the basis that the property will be used for owner occupation. Once you start renting out your property, this is no longer the case. Lenders are therefore within their rights to demand repayment in full of the amount you have borrowed, which for most people would not be possible. Or they might issue you with penalty charges and put a limit on how long you can rent out your property for.
Banks and building societies are also becoming increasingly sophisticated at tracking down ‘accidental landlords’, so there is a big risk if you knowingly let your mortgaged property without informing you lender.
A slight spanner in the works is that even if you do inform your lender, they are under no obligation to grant consent. However, if that is the case, it is possible to remortgage to a specific buy-to-let mortgage – more on that later.
If you lender is happy to give consent, it may come with a few strings attached. You could find yourself paying a higher rate, reflecting the change of property usage. And you may also be charged administrative fees for the change. Each lender is different, so it is best to check with yours to find out what their policy is.
Depending on what happens when you inform your lender of the change in status of your property, you may want to consider a buy-to-let mortgage – either straight away, or as an option to switch to once your current mortgage term ends.
Buy-to-let mortgages are designed for landlords. They typically have higher rates than residential mortgages, as the likelihood of void periods (when there is no rental income because the property has no tenant) is higher, and this is considered to pose a threat to repayments. Also, there are tighter lending controls for landlords. They must prove they could afford loan payments if interest rates were to rise. But with interest rates relatively low, a specific buy-to-let mortgage could be a good fit depending on your circumstances.
Renting out your home has other implications beyond your mortgage. It is best to know your income tax and capital gains tax liability. All rental income must be declared on a self-assessment tax form. You can potentially claim certain expenses to offset against your rental income and reduce your tax bill. You may also be able to take advantage of the property income allowance, which means property owners can earn up to £1,000 rental income tax free each year. In terms of capital gains tax, this will only apply if you are selling a property which isn’t your main home.
Finally, if you are to rent out a property and become a landlord, there are certain insurance policies that you need in place. One thing you may not have considered is a change of home insurance. If you only have a residential policy in place when you rent out your home, if something were to happen to your property, your insurer may not pay out. Therefore, it is best to take out landlord buildings insurance as soon as you decide to rent out your home.
There are other legal responsibilities you will have as a landlord, and information about these can be found on the Money Advice Service website.