Buy-to-let mortgage: is it illegal to rent a house out without one?

The Telegraph have just run the following article:

A new wave of accidental landlords could find themselves in hot water with mortgage lenders

For every professional landlord with a thriving (and sizeable) property portfolio, there is another who fell into the sector by accident.

Frequently those who are upsizing or moving in with a partner will choose not to sell their original property, leaving an empty flat or house to be rented out.

The events of the past year also triggered a new wave of accidental landlords, as homeowners reassessed priorities and frenzy gripped the property market.

Many of these will forget, or simply not bother, to notify their lender of their change of circumstances – and the results could be disastrous.

Failing to notify your lender you intend to rent out a property could be financially ruinous. Technically, your mortgage provider could demand instant repayment of the whole mortgage, something most homeowners will not be able to afford.

You should get in touch with your lender and ask for “consent to let”, which grants permission for the property to be rented out for a limited period of time.

This does not always mean your borrowing will become more costly straight away. Many providers will grant approval for the remainder of your mortgage deal without raising the rate.

But consent to let is only a temporary solution and longer-term landlords are better suited switch a residential mortgage to a buy-to-let version.

What is a buy-to-let mortgage?

Conditions included in most residential mortgages do not allow borrowers to let the property and so a specific buy-to-let loan is required.

Banks and other lenders tend to view buy-to-let mortgages as riskier than their homeowner counterparts. The likelihood for void periods – the time when there is no rental income between tenants moving out and new ones moving in – is high, potentially threatening repayments.

The Bank of England has led the charge on regulating the landlords’ mortgage market more closely and introduced new, tighter affordability rules for landlords in 2017. These changes, alongside a punitive tax shake-up, have pushed hundreds of thousands of landlords to exit the market. 

Generally rates on buy-to-let mortgages are higher, sometimes by as much as one percentage point. This will, of course, increase monthly payments.

However, Aaron Strutt of Trinity Financial, the brokers, said the potential downsides of being caught out made a buy-to-let mortgage worth choosing if your plan is to let a property.

He explained: “Many of the rates are very cheap and the additional costs may well be worth paying to avoid the potential black mark on your credit report if you are found to be in breach of the rules.”

Historically, property owners were able to register some of the mortgage interest as a business expense, meaning it could be claimed as tax relief. But as of April 2020 this was replaced by a 20pc tax credit. 

How does it work for first-time-buyers?

Most lenders will require a bigger deposit for buy-to-let mortgages, because of their riskier nature, and this can shut out first-time buyers from investing in the market.

Minimum deposits on this type of loan sit in the region of 20-25pc, but, as with a residential mortgage, a bigger deposit will open up better mortgage rates.

This type of borrower should also be aware they will not qualify for the usual first-time buyer stamp duty relief if buying a property in which they do not intend to live. But they will also be exempt from additional buy-to-let tax rates, meaning they pay standard stamp duty on the purchase.

Is it illegal to rent your house without one?

Letting a property without consent from the lender is considered a breach of the terms and conditions of the loan, effectively amounting to mortgage fraud. According to the trade body UK Finance this could entitle the lender to seek immediate repayment of the entire loan.

While this does not often happen in practice, in most cases the lender would be within its rights to do so.

Typically the lender will agree to a change in the terms. This may mean the rate increases or a limit is placed on the number of years the property can be rented out. You may also be charged an administration fee which could be several hundreds of pounds.

But will I get caught?

Many accidental landlords take the view their lender is very unlikely to find out, and therefore the risk is worth it. However, banks and building societies have developed increasingly sophisticated methods of catching out armchair buy-to-let investors.

Something as simple as a tenant returning mail sent to the property in your name by the lender could trigger an investigation and result in you getting caught.

Telegraph Money has reported in the past that lenders are using complex data sifting methods similar to those used by HM Revenue & Customs to catch tax avoiders. This reportedly involves scouring the internet for clues the property may be let out.



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