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Do I really need a buy-to-let mortgage to rent a house? - Ask Our Expert

Our money expert says…

Hi James,

The main thing to know here is that what you are talking about is essentially fraud. You may be exposing yourself to possible legal repercussions if the lender found out.

You may well think that “they’ll never find out” but what if for example, the house burned down or there were other issues caused by the tenant? You would have breached your contract and could face repossession. On top of that your insurance policy would be invalid.

Basically, once you have signed the residential mortgage, the conditions will stipulate that you inform the lender if you have a tenant at any point - if you don’t do this, you could easily end up in a pickle.

Buy-to-let:

Although more expensive than residential mortgages, if you really intend to rent out your property the best idea would be to take out a buy-to-let mortgage from the outset.

The three key differences of a buy-to-let mortgage include:

• Rental potential - the decision as to whether or not a mortgage will be offered is usually based on the rent you will earn as well as your income. In some cases your income is not ever considered.
• Interest rates - buy to let mortgages have slightly higher interest rates.
• Larger deposit - typically a minimum of 20% or 25% of the property's value is required as a deposit.

In reality, yes buy-to-let mortgages are slightly more expensive, but the margins are not so great that it is worth having your home repossessed if the lender finds out you are letting out your property behind its back.

Already a homeowner

If you already have a residential mortgage but want to start renting out your property, you must get consent to let from your mortgage provider.

This would be the safest thing to do, and will probably save you a lot of trouble in the long run.

Some lenders will insist on your moving to a different buy-to-let product, some will just grant consent as a formality and maybe increase the interest rates slightly.

If you don't get permission from your mortgage lender, this could have serious consequences - the lender can demand full payment of the loan, and even take possession proceedings against you if it chooses.

Insurance is the main concern

Importantly you will need to let your insurance provider know that you are now renting out your property, and you may have to take out a new buildings insurance policy that covers let property.

This is the key thing because if something does go wrong and you have not informed the insurance company, you will not be covered and it could be a disaster.

HMRC

Also if you turn your home into a rental property, don’t forget to declare your earnings to HMRC.

Renting out your house is a business and a source of income. If you do not declare this as such you could essentially be guilty of tax evasion.

According to the Council of Mortgage Lenders (CML), when you buy a property to let out, you are becoming a landlord.

And owning investment property is not like owning your own home. Instead you are effectively running a small business and you have important legal responsibilities, for example with regard to your tenants’ safety, as well as tax responsibilities regarding income.

Other possible problems

Also be aware of certain perils such as the tenants failing to pay the rent for six months.

It can take up to nine months to evict someone, your mortgage provider will find out, your insurance will not cover the legal costs and you may end up with a trashed property.

The basic message is: the risk of things going wrong if you don't tell your lender is huge, while the cost of telling your lender about what you plan to do can be very low.

Checklist for renting out your home

To make sure you’re fully covered follow the following rules:

1. Speak to your lender to ascertain their position on the matter; they may impose commercial rates. Also check your current mortgage terms and conditions
2. Rent can be taxed after a certain amount, as it would then be classed as income. Speak to the Inland Revenue for more information
3. Your insurance company should also be notified, to ensure you have the right cover if the flat is tenanted.
4. Who would manage the property, either yourself or an agent? A rental property will require upkeep and someone to deal with emergencies. Are you willing to sort out problems at short notice?