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August 2, 2023

Can You Rent Out Your First Home?.

By Emma Jones

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Renting First Home

If you’re looking to generate a steady source of income while you’re away, renting out your home can be an appealing option. But what if you’re still paying out your property? Can you rent out your first home even if it’s still under mortgage? Below we’ll look at what options are open to you if you are hoping to rent out your first home. We’ll also help you consider any legal requirements, challenges, and advantages and disadvantages of becoming the landlord of your first home. 

By the end of this article, you’ll be able to understand the considerations, risks, and rewards associated with renting out your first home. 

Can You Rent Out Your First Home If It’s Still Under a Mortgage?

Yes, it’s possible to rent out your first home even if it’s still under a mortgage. However, the renting-out process isn’t as simple as putting out a “For Rent” sign in your front garden and waiting for a future tenant to move in. 

There are several important considerations to keep in mind when renting out your property, including mortgage restrictions, financial implications, legal and tax obligations, and more. 

But before we get into the nitty-gritty of the topic, you must understand the difference between a residential mortgage and a buy-to-let mortgage. 

What’s the Difference Between a Buy-to-Let Mortgage and a Residential Mortgage?

A residential mortgage, also known as a buy-to-live mortgage, is a loan taken out on a property to live in and call home. The borrower pays a deposit of at least 5% of the property price and borrows the remaining amount from a lender. 

A long-term residential loan can span 10, 15, or even 30 years, provided that the borrower makes regular monthly payments over the agreed-upon terms of the loan. 

On the other hand, a buy-to-let mortgage is a loan you get from a lender to buy a property to rent out. This type of mortgage tends to have higher fees and higher interest rates. 

And unlike residential mortgages, most buy-to-let mortgage lenders require a deposit of at least 25% of the home’s value, with some requiring up to 75%. 

A buy-to-let mortgage isn’t regulated by the Financial Conduct Authority (FCA) either. This could present certain risks and drawbacks, including limited access to complaint resolution and a potential lack of transparency. 

The exception to this rule is if the borrower rents the property to a close family member, such as a partner, a parent, a child, etc. In such cases, the mortgage is considered a consumer buy-to-let and follows the same regulations as a residential mortgage. 

You cannot rent out a property with a residential mortgage unless you buy out the property, switch to a buy-to-let mortgage, or discuss a consent to let with your lender

Failure to comply with these terms can result in financial penalties, repossession, eviction, and other legal liabilities.  

What Is Consent To Let? 

A consent to let is a formal, written agreement that allows the borrower to let out a residential property for a certain period without changing the terms of the residential mortgage. 

A consent to let can be a helpful way to ensure your mortgage is paid while you’re waiting for your home to sell or a buy-to-let mortgage agreement to go through. It also allows you to legally rent out your home while you’re abroad or living elsewhere. 

There are no set-in-stone criteria to follow when applying for consent to let. Every lender has their specific requirements but typically, you need to meet the following conditions: 

  • Have been with the lender for at least 6 to 12 months 
  • Have a timely payment record, with no more than one missed payment  
  • Have an acceptable tenancy agreement in place
  • Comply with a maximum number of tenants on one agreement (for example, up to four or five people in a two-bedroom home)
  • Obtain approval from your insurance provider 
  • Agree to a maximum length of term, usually ranging from 6 to 24 months  
  • Meet a minimum income threshold 
  • Meet a certain level of equity in your home (for example, at least 25%)

It’s important to note that lenders are well within their right to refuse consent to let, even if you fulfil the terms above.  

What Are The Costs Associated With Consent to Let?

Applying for consent to let is by no means free. Some lenders charge an extra percentage rate on your existing mortgage fee, while others request a one-off fee of between £150 to £300. 

Some may charge no fees at all. It ultimately depends on the lender and the terms of your mortgage agreement. 

Here are some costs you may encounter: 

  • Higher interest rate: Your lender may apply an additional interest rate on top of the original payment. The interest rate may fall between 2% to 5%, though some lenders may charge higher.  
  • Administrative fees: Your lender may charge administrative fees for processing your application. This fee is typically paid upfront and costs no more than a couple of pounds. 
  • Additional documentation: Your lender might ask you to obtain certain documentation before processing your request. This may include proof of compliance, tenancy agreements, landlord insurance, and other supporting documents.
  • Professional advice: You might want to hire a lawyer or seek professional advice to seamlessly navigate the consent to let process. You can always contact When The Bank Says No, our expert team of mortgage brokers will be able to assist you with finding the best possible deal for you.
  • Tax of rental income: You’re required to pay tax on the profit you make from renting out a property. The first £1,000 is tax-free as it’s considered Property Income Allowance, but anything beyond that is taxable. 
  • Landlord insurance: In the UK, the average cost of landlord insurance is between £170 to £200 a year, depending on the insurer. 

What Are the Pros and Cons of Consent to Let? 

Here are some of the biggest pros and cons of getting consent to let from your lender: 

Pros 

  • Gives you the freedom to move to another place without paying two separate mortgages.
  • Provides you with a good source of rental income while you’re away.
  • Allows you to keep your existing mortgage in place and potentially benefit from property value appreciation over time.
  • Allows you to test out renting without having to commit to the strict regulations of buy-to-let mortgage migration. 
  • More straightforward than switching from a residential mortgage to a buy-to-let mortgage. 

Cons 

  • Additional requirements and costs may be imposed by the lender. These costs may outweigh the overall profit you may receive from renting out the home. 
  • Possibility of the tenants moving out before the agreed-upon term or finding no tenants at all. When this happens, you’ll be forced to cover your mortgage fee repayments plus any additional interest rate charged by the lender. 
  • Renting out a property opens the possibility of property damage, legal disputes, and problematic tenants.
  • Landlords are legally obligated to comply with tenancy laws, safety regulations, and other responsibilities, which some aren’t ready to fill. Failing to meet those obligations can result in penalties. 

Can I Switch My Residential Mortgage To A Buy-to-Let? If So, How? 

If your landlord didn’t agree to a consent to let or you’re planning to rent out your home indefinitely, you can switch your residential mortgage to a buy-to-let mortgage. 

A residential to buy-to-let conversion is a fairly common practice and often occurs when people:

  • Move into a new property with a partner
  • Want to purchase a new home 
  • Move to a new area or travel outside the UK for work purposes 
  • Move away from their current home for a notable period

To assess how much you could raise on your property, buy-to-let mortgage lenders calculate the loan-to-value (LTV) and interest coverage ratio (ICR) of your home. 

Most lenders require a rental income of at least 25% on top of the monthly interest-only mortgage payment. This means that if your mortgage payment is £1,000 per month, you’ll need to charge at least £1,250 as a rental fee. 

First-time landlords with no other properties to their name may find it difficult to switch from a residential to a buy-to-let. And since first-time landlords pose a greater risk to lenders, the size of the deposit required is higher than that of residential mortgages. 

Buy-to-let mortgage lenders also tend to apply more stringent eligibility checks than residential with consent to let. You’ll have to pay for home maintenance costs, gas and electricity safety checks, insurance, and capital gains tax (CGT) on any gains you have made.

Is It Difficult To Switch To A Buy-To-Let Mortgage? 

If you’ve just recently taken out a residential mortgage and don’t have much equity in the house, you might find the migration process a bit more challenging than most.  Without much history to your name, the lender might ask for up to 75% of the value of a home before a remortgage. 

If you took out the residential home for 5% to 10% of its value, you might not have enough equity yet to proceed with the switch. But if you’ve had the house for a long time and haven’t missed a single payment, you should be able to move to a buy-to-let without much hassle. 

Seeking help from the right mortgage broker can greatly expedite the migration process. We’re here to help you navigate the complexities of mortgage transfers, secure the best rates, and find the ideal financing solution to rent out your first home.  

What Are The Costs Associated With A Buy-To-Let Migration?

The costs associated with a buy-to-let migration are much like consent to let but with a few additions. 

  • Deposit: The new lender may require you to fund a deposit of between 25 to 75% before they consider your loan application, alongside associated costs like stamp duty and mortgage admin fees. 
  • Valuation or survey fees: The new lender may require a valuation or survey to assess the condition and rental value of the home. Fees associated with this service can range from a few hundred to a few thousand pounds. 
  • Letting fees: Upon finalising the migration, you’ll need to carry out property repairs and purchase furniture, appliances, and equipment for your new tenant. You’ll also need to file a Gas and Safety Report to comply with legislation.  
  • Insurance: You’ll need to take out landlord insurance, as well as public liability insurance and rental insurance to protect your investment property. 
  • Early repayment charges: If you switch lenders, you might be subject to early repayment fees. These charges can either be a set fee or a percentage of the outstanding loan balance. 
  • Licensing fees: Depending on the property’s location, you might need to obtain certain permits or licences to operate as a landlord. The fee can range anywhere from £370 to upwards of £1,000.
  • Ongoing maintenance fees: As a landlord, you’re responsible for maintaining your property. You’ll need to set aside a budget for electrical, plumbing, and general upkeep to ensure the property stays in good condition and complies with safety regulations. 

What Are The Pros And Cons Of A Buy-To-Let Mortgage? 

Here are the advantages and disadvantages of switching to a buy-to-let mortgage instead of a consent-to-let: 

Pros 

  • Upon securing a tenant, you’ll receive a regular source of income that can help you boost your savings.
  • Unlike consent to rent, you’re not bound by time limitations. As long as you can pay off the mortgage, you can rent out your property for as long as you want. That also means no restrictions on tenancy for your tenants either, so if you find good ones, they can stay for as long as they please too. 
  • Owning a buy-to-let property allows you to diversify your investment portfolio beyond traditional bonds and stocks. 
  • There’s a consistent demand for rental properties across the UK. This makes buy-to-rent an excellent long-term investment that can generate a lot of money.

Cons 

  • Higher mortgage fees and taxes. 
  • If your tenant misses a payment, you’re responsible for paying the mortgage yourself. 
  • Being a landlord comes with plenty of legal and moral obligations, which may be too overwhelming for those managing a full-time job. 
  • Buy-to-let properties are subject to higher stamp duty rates.

FAQs 

What happens if I rent out my home without telling my lender? 

If you let out your property without proper consent, it’s considered a breach of contract. The lender may threaten to repossess the home, raise your mortgage rates, or demand you pay back the mortgage immediately. 

What’s the difference between consent-to-let and buy-to-let? 

With consent to let, you get to rent out your residential property without having to remortgage or switch to a new lender. The downside to this is that you can only rent out your home for 6 to 24 months, depending on the conditions discussed with the lender. 

With a buy-to-let conversion, you’ll need to search for a new lender and apply for a remortgage. Upon completing the migration, you can rent out your property for as long as you want. 

Can You Rent Out Your First Home Summary 

The answer to the question: ‘Can you rent out your first home?’ is yes—as long as you discuss the terms with your lender. 

If you’re planning to let out your home for a short period, you might find it beneficial to ask for consent to let out. But if you’re planning to rent it out indefinitely, switching your residential mortgage to a buy-to-let mortgage should be your go-to choice.

In the latter case, you would do well to work with a specialist mortgage broker, like a member of our team at When The Bank Says No because we’ll be able to find you the best mortgage deals with the best terms to suit your circumstances. 

Emma Jones

Emma began her career in Lloyds Banking Group, first in the unsecured loans department at HSBC and later as a mortgage advisor at Lloyds. During 9 years in these roles and a further 2 years at Yorkshire Building Society, Emma was able to observe the impact of the recession, and how the the banks let their customers down by denying loans and mortgages.

Wanting to be a driving force for change, she stepped into a market advice role where she has been able to help clients when others couldn’t. Identifying a gap in the mortgage space, Emma went on to establish When the Bank Says No. As a keen property investor, she has been the focus of features in publications including The Sunday Times and This is Money.

Emma’s greatest joy is overcoming the low expectations of their customers, many of whom have all but given up on getting a mortgage due. Emma and her team’s passion for helping people overcome the challenges they may face when applying for a mortgage have fuelled the success of When the Bank Says No.

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