By Ben Gosling of commercialtrust.co.uk
Letting out your home so you can rent elsewhere is a growing trend in the UK. How does it work, and what are the benefits?
A property agent recently observed a growing number of renters who already own and let property elsewhere. This is the phenomenon known as ‘let to rent’. Though homeowners have been letting to rent for some time, the trend is growing.
How let to rent works
You might have heard the more familiar term ‘let to buy’. Letting to buy entails buying a new property for occupation, but letting out your old home rather than selling it.
In a let-to-rent scenario, there is no onward purchase. Instead of buying a new home, you rent one.
There are a number of reasons you might do this. Moving costs and difficulty in finding mortgage finance are big factors. And many homeowners move for work, sabbaticals, their child’s schooling or even just to try living in an area before they commit to buying.
Considering let to rent? Here’s what to bear in mind
Finance will of course be an issue. Some let-to-rent landlords are content if their property pays for itself, but others will want to turn a profit. This is particularly true if they move to a more expensive area.
Whether you ask your existing lender for ‘consent to let’ or refinance to a buy-to-let mortgage, the rental income will need to cover your mortgage repayments. The usual threshold is 25% above the repayment amount, using an interest ‘stress rate’ of around 5% per annum. But lenders are beginning to tighten their rental calculation thresholds, so the figures may be higher.
Remember also that your rental income is taxable.
You can claim tax relief for any costs you incur in managing and letting your property. But you cannot offset the rent you pay yourself or any moving costs, such as letting agency fees.
At present, you can also offset the mortgage repayments you make on the property you let, but in April 2017, this system will begin to change.
Landlord tax is a complicated area, so be sure to discuss your options with a tax advisor.
Landlord and tenant law
An area even more complicated than landlord tax is landlord law. Property rental is the subject of dozens of Acts of Parliament and centuries of case law.
Central to this are rights that your tenant will have, irrespective of what is in the tenancy agreement. As long as they live there, your property is your tenant’s home, and they have the right to quiet enjoyment of it. The law also protects them from illegal eviction.
Find out more about a landlord’s responsibilities.
Inexperienced landlords may prefer to instruct a letting agent to manage their property for them. If you do this, ensure that the agent has accreditation from a professional body such as the Association of Residential Letting Agents (ARLA).
Your property’s suitability
Homeowners and renters don’t always want the same things. Indeed, it is quite possible that you live in an area without much of a rental market, or that your property is unsuitable for most local tenants.
Your property’s rental valuation will reflect this. But it is something you should consider before you start down the let-to-rent route.
Also consider that tenants are paying for a service as well as a place to live. You might be able to put up with the faulty thermostat or the wasp’s nest in the fuse box, but issues such as this could bring down the rental value of your property. Glaring problems can even make your property unfit for habitation.
What are your options for finance?
Residential mortgage agreements prohibit letting out the property without the lender’s permission. Since the financial crisis, lenders have been fastidious about enforcing this rule.
So if you wish to let out your property you have two options. You can ask your lender for consent to let, or you can refinance to a buy-to-let mortgage contract.
Consent to let
Consent to let does not involve changing your mortgage agreement. This can be useful if repaying your mortgage would cause you to incur early repayment charges, though your lender could still charge a consent-to-let fee. They are also likely to increase the interest rate you pay.
Furthermore, consent to let tends only to be temporary, and may not be suitable for longer let-to-rent arrangements. And of course, there is always the chance that your lender might refuse outright.
If you wish for a longer-term or permanent change, a buy-to-let remortgage may be more suitable. This will involve repaying your existing mortgage in full and taking out a new one with some quite different features.
This option will not be appropriate if you don’t have a lot of equity in your property. Buy-to-let mortgages need a deposit of at least 15% of the property value, but it can still be difficult to find deals with deposits of less than 25%. Clients in the best position have deposits or equity worth 40% or more.
Your buy-to-let mortgage is likely to be more expensive than your old mortgage. If you have a limited budget, it is even more important that your property fetches as consistent and healthy a rent as possible.
Buy-to-let lender criteria for let-to-rent clients
Let to rent is a niche arrangement that not all buy-to-let lenders will consider.
Over two thirds of the lenders we deal with consider let-to-buy applications, where the applicant rents out their old property and buys a new one. But only a handful of specialist lenders will consider cases where there is no onward purchase.
These lenders will look at the whole situation, including the reason for the client’s decision to rent rather than buy. The application might involve more extensive underwriting than normal.
Due to the rarity of let-to-rent finance, you may wish to speak to a professional buy-to-let mortgage advisor about how best to proceed.