First-time buyers will usually opt for a smaller property at first just to get on the property ladder as a starting point. But what happens when it’s time to move on to a bigger place? Or even simply take some time away from the property before returning? Well, there are options available for you, including if you’re still paying on the property under mortgage.
Below we’ll look at what options are open to you if you are hoping to rent out your first home – remember though, your specific mortgage provider and type. 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 risks and rewards associated with renting out your first home.
What Is A First-Time Buyer Mortgage?
Being a first-time buyer can be challenging, especially with all the different rules and conditions you must know. So let’s straighten some things out here.
You qualify as a first-time buyer if you’ve never owned property inside or outside the UK, whether this property is an inherited, residential, or investment property. The good news for the business owners amongst you, though, is if you already own a commercial property, such as a shop or an office, you can still qualify as a first-time buyer!
First-time buyer mortgages don’t require a significant down payment, as it usually starts at 10%. However, the bigger the mortgage deposit, the easier a competitive mortgage deal will be to find.
After passing the credit check and affordability test, you can buy the property and pay off the mortgage. Your monthly mortgage payments depend on the interest rates you secure and deposit you put down initially.
Since the purpose of the loan is to own a residential property, not a buy-to-let property, you won’t be able to move out of the property and rent it out for monthly rental income (as you would with buy-to-let mortgages) if you keep your mortgage the same. A change will be necessary.
When you sign up to your mortgage one of the main conditions is that the property be your only or main residence and you must treat it as your own home without renting out to others. Breach those conditions, and you’ll be in breach of contract and could face serious consequences.
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 as first time buyers. 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?
Residential Mortgages
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, usually 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.
Buy-To-Let Mortgages
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 because you’ll essentially be making money off the investment.
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% depending on the circumstances of the house, loan, and borrower.
Can I Rent Out A Residential Mortgage Property?
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 because it would be considered a change of agreement that you had already agreed to.
What Are The Costs Associated With Consent to Let?
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. 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 few 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, including helping you switch to a buy-to-let mortgage long term where necessary.
- 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:
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How Can I Switch My Residential Mortgage To A Buy-to-Let?
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:
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How To Rent Your Property As A First-Time Buyer
If you already own a property as a first-time buyer, you can still rent it out. Here are all the different ways you can rent your house:
Pay Off Your Mortgage
This is the best option if you’ve had your mortgage for a while and are now in a better financial position. The mortgage rate might not reflect your current income or financial situation, or you might have saved a lump sum.
In this case, you can pay off some or all of the mortgage. Then, the property will be legally yours, and you can do what you please with it, including renting it out!
Typically, lenders will allow you to overpay the mortgage by up to 10% annually without any penalties. Otherwise, you can pay off the loan in the following ways:
- Overpaying: If your income increases, you can increase the monthly payment accordingly. In turn, this will reduce the mortgage term, but you may suffer penalties if you go over the 10% annual
- Lump sum: You can pay off the mortgage in full if you have a lump sum of money. That said, the lender will likely charge you a fee depending on how early along the mortgage term you’re paying it off.
- Shortening the term: Instead of increasing the monthly payment, you might decrease the mortgage term. Then, the lender will assess the extra amount you’ll need to pay each month.
Obtain Consent To Let
Paying off the mortgage is easier said than done. Luckily, you can still rent your property even if it’s under a residential mortgage. All you need to do is obtain the lender’s consent to let.
You must understand that mortgages are regulated by the Financial Conduct Authority (FCA) as long as the loan is residential and not to a commercial borrower. So, you shouldn’t financially benefit from the mortgage.
If you want to rent the property, the lender must agree and adjust the terms and conditions of the mortgage accordingly. Still, this is ultimately the lender’s decision, so they have the right to refuse to rent out the property outright.
If the lender agrees, they reserve the right to choose the tenant, the paid rent, and the lease terms.
The lender might not give you consent to let. So, under certain circumstances, you might have to consider remortgaging the property in the following cases:
- You don’t have a convincing reason to rent out the property
- The rent is too low
- You’re not paid up on your mortgage repayments
Remortgage
You can switch your residential mortgage to a buy-to-let mortgage by remortgaging.
Remortgaging your property is a lot less expensive than getting a new mortgage on another property. You won’t have to pay the enormous 25% down payment to start.
Yet, this involves having substantial equity to serve as the down payment for rental properties. To explain, your previous mortgage payments will act as the down payment for the buy-to-let mortgage. If the property cost £300,000 and you’ve already paid £100,000, then you’ve paid up ⅓ of the loan.
It’s worth noting that the lender probably won’t approve of remortgaging after a short while as you won’t have enough equity, and your lender might refuse to remortgage into a rental property at all. In this case, you might have to remortgage with other lenders.
You should also consider that the terms and conditions of your mortgage will differ completely. First, you’ll have a larger interest rate. Then, the lender will charge you an admin fee and stamp duty. How much stamp duty land tax an owner will pay depends on the property value.
Additionally, this isn’t a short-term solution. Instead, the property will become a buy-to-let property, you won’t be able to move back, and the mortgage repayments will be much more expensive.
You can assess whether you’ll be able to afford a buy-to-let mortgage using a buy-to-let mortgage calculator.
Partially Rent The Property
If you want to earn some extra income without moving out of your house, you can partially rent or get a lodger for rental income! This is just like getting a roommate.
You won’t be breaching any terms and conditions of your mortgage, and you won’t need to remortgage or obtain consent to let. After all, you’ll be living in the house.
Still, this depends on the terms and conditions of your mortgage agreement. Some lenders only approve of short-term occupancy through specific platforms, such as Airbnb.
Simply put, you’ll need to have constant access to the property and have valid building insurance. If you’re unsure whether your mortgage terms include partial rent, it’s best to inform your lender beforehand.
Can A First Time Buyer Rent Out Their Property: FAQs
1. 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.
2. 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.