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Accidental landlords: can you let out your own home?

New deal lets homeowners convert from residential to buy-to-let mortgage

If you want to move house but are struggling to sell your home, letting it out may be your best option. But taking a rental tenant can breach the terms of a residential mortgage, so what can you do?

A new mortgage from Sainsbury’s Bank is targeted at homeowners who need to switch to a buy-to-let mortgage – but it’s certainly not your only option if you find yourself becoming an ‘accidental landlord’.

We weigh up the pros and cons of Sainsbury’s new mortgage deal, and look at what your other choices are if you decide to let out your current home.


Can you let out your home?

When you buy a property with the intention of letting it out, you need a buy-to-let mortgage. This tends to carry different lending criteria from a residential mortgage, including whether your rental income can pay off your mortgage, known as the ‘coverage rate’.

It may also be interest-only, meaning you pay back just the interest each month, not the loan itself.

But what if you find yourself as the owner of two properties? This can happen more often than you think, including if you inherit from a relative, need to move for work, or are moving house and struggling to sell in a slow market.

In any of these scenarios, you may find yourself needing to let out a property that was originally bought using a residential mortgage.

Doing this may violate the terms of your mortgage agreement. Being caught could result in a penalty from the lender, or even the full loan amount being called in – so it’s vital that you get the right mortgage terms in place before taking on a tenant.

Sainsbury’s ‘accidental landlord’ buy-to-let mortgages

Sainsbury’s Bank has launched a new range of buy-to-let mortgages including the ‘consumer buy-to-let mortgage range’, which is specifically for accidental landlords.

With this range, existing homeowners can apply to remortgage a residential property as buy-to-let in cases where they’ve inherited a property or are unable to sell. To qualify, you’ll need to show that you didn’t buy with the intention to let and you don’t own any other buy-to-let properties.

Owners can make the application before renting out the property, or after finding a tenant.

So, what’s the catch? Firstly, your property will need to meet the same rental income requirements as any other buy-to-let property. This may mean the rental income needs to cover 125% of your mortgage (or even 145% if you’re a higher- or additional-rate taxpayer).

You’ll also need to show that you could continue to meet the mortgage payments if your interest rate rose above 5%.

In addition, as an ‘accidental landlord’, you’ll need to show that you can fund your current lifestyle without relying on rental income – which isn’t required of investors.

The Sainsbury’s buy-to-let range is only available through intermediaries, so you’ll need to speak to a mortgage broker if you’re interested in applying.

Remortgaging with your lender

While the Sainsbury’s Bank deals are specifically targeted at accidental landlords, other lenders may also be open to helping you remortgage.

If they don’t have a specific product to cater for your situation, the main difference may be that you’ll have to make a case for yourself, and the lender may be less amenable if you’ve already started letting.

If you move to a purely buy-to-let mortgage, you might be required to meet the same criteria as other investors. This varies from lender to lender, but will often mean that the rental income needs to cover 145% of your mortgage payments, even if your interest rate rises to 5% or more.

When remortgaging, it’s worth looking for the lowest possible rate on a deal that suits your circumstances. You should also consider the length of deal you’d like to sign up to, keeping in mind that early repayment fees may be payable if you want to end it before the end of the deal period.

Consent to let

An alternative to remortgaging is asking your lender for a ‘consent to let’. In some circumstances, they may be willing to give you permission to rent out your property – but this is only likely to be the case if you genuinely had no plans to rent when you bought it.

Often, the lender will require you to pay an additional percentage on top of your existing mortgage interest rate and there may be an arrangement fee.

A consent to let is usually granted with a limited timeframe – often for 12 months at a time, or until the end of your fixed-rate deal period. This can make it especially useful if you’re hoping to dodge early repayment charges, or are planning to be away for a work posting.

Lenders may also consider how long you’ve been with them, the equity you hold, and your income.

If you own a Help to Buy or shared ownership property, there may be specific clauses within your contract that forbid letting outright.

Other considerations for accidental landlords

An ‘accidental’ landlord has the same obligations as any other landlord – so make sure you fully understand the implications of signing a lease.

Aside from finding and screening new tenants, you’ll need to keep the property in a safe condition, or pay a management agent to do so on your behalf.

You’ll also need to meet your legal obligations, including carrying out Right to Rent checks, putting deposits in an authorised scheme and, in some areas, registering with a local council or association.

You may also face the following costs:

Landlord insurance

Your normal home insurance policy is unlikely to cover damage done by tenants living in the property and may be voided by a rental agreement.

To protect your home, you’ll need to take out landlord insurance.

Void periods

Unless you’re lucky, your property may be empty for several weeks between old tenants moving out and new ones moving in.

Make sure you can meet the mortgage payments even if the property is standing empty.

Income tax

Your rental income will be treated as income tax, which may nudge you into a higher tax bracket.

At the same time, you may be able to claim tax relief for a percentage of your mortgage interest – although this is being scaled back and replaced with a 20% tax credit. You can learn more about the changes in our guide to tax on rental income.

You may also be able to claim back tax on items you buy to replace worn-out fittings or furnishings in the property.

Capital gains tax

If your home is being let out at the time you sell it, you may face a capital gains tax (CGT) bill – but relief may be available.

In 2018/2019, you can earn £11,700 profit before you need to pay capital gains tax. On earnings above this, you’ll pay 18% as a basic-rate taxpayer, or 28% as a higher- or additional-rate payer.

If you moved out less than 18 months earlier, you can claim ‘private residence relief’, meaning you won’t pay any CGT.

If it was longer than 18 months ago, you may be able to claim ‘letting relief’ on the additional months, to a maximum of £40,000.

We explain how it works in our guide to capital gains tax and property.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

Categories: Money, Mortgages & property

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