New landlord? Make sure your mortgage doesn’t land you in trouble

There are lots of different reason why you might become a new landlord. Of course, you may have planned to become one, investing in a property to rent out to tenants. However, many people become ‘accidental landlords’. They might rent out their old home after moving to a new one. They may decide to go travelling for a year, renting out their house while they’re away. Or they might decide to move in temporarily with a relative as their carer, letting their home for the duration.

However, whether you fully intended to become a new landlord or you’ve become one due to circumstances, the rules about letting out your property are the same. For example, you have legal obligations as a landlord, including responsibility for fire, gas and electrical safety. You have to report your rental income to HMRC via your Self-Assessment Tax Return (unless your properties are held by an entity such a limited company). Also, if you later sell a property that has been let out, there are Capital Gains Tax implications.

That said, new landlords often make a very common mistake: they don’t tell their mortgage lender they have begun letting out a property. It’s absolutely essential to do this – and this post shows you why.

Why do new landlords need a new mortgage?

If you begin letting out what was your main residence, it can be tempting to keep your personal mortgage in place.

This can be a big mistake. The terms and conditions of personal mortgages usually prohibit you from letting out a property unless it’s for a short period and you plan to return. Even then you will almost always need permission.

If your lender finds out that you have tenants in your home, the following things could happen:

• Your lender could demand immediate repayment of the entire mortgage
• You could be slapped with higher charges and interest rates
• Your mistake could land up on your credit record, making it harder to re-mortgage

As you can see, it’s not worth running the risk of getting caught! Some lenders use sophisticated techniques which will check the internet for evidence that a property is being let out. Even simple things can alert your lender that something is amiss. For example, if one of your tenants returns mail to your lender, it will immediately trigger alarm bells.

So, if you have become a new landlord, you need to fix your mortgage situation as soon as possible. Depending on your circumstances, you may or may not need a buy-to-let mortgage. Let’s take a look at the different options.

Buy-to-let mortgages for a new landlord

If you intend to become a landlord permanently, your best long-term option is to switch to a buy-to-let mortgage.

However, you need to bear a number of things in mind about these mortgages.

• Fees and interest rates are usually higher
• Deposits tend to be higher as well – 25% is common
• Most BTL mortgages are interest only, so you need to pay the full loan at the end of the mortgage term
• You need to meet affordability rules. As a minimum, projected rental income will need to be 125% of mortgage payments. However, these days, many lenders ask for 145%. You also need to note that this ‘stress test’ is not applied to the current interest rate of the mortgage, but at a higher rate that takes account of potential interest rate rises. So, if your mortgage has an interest rate in the region of 4%, the affordability test could check you will have still have 145% rental income if the interest rate rises as high as 6% or above.

You can learn more about buy-to-let mortgages here.

Another option: consent to let

If you are only letting out your property (or even a room in your property) on a temporary basis, a better option may be to get a ‘consent to let’ from your lender. Also known as a ‘lease permission period’, this is a temporary agreement to let out part or all of your home.

This can be a good arrangement in certain circumstances. Common reasons for applying for ‘consent to let’ include:

• You need to temporarily live in a different area for work purposes.
• Letting out your property while trying to sell it.
• You need to move out in the short term to provide a relative with care, or to travel.

You still need to bear in mind that a consent to let arrangement is likely to result in extra fees and increased interest rates. In addition, you still have to meet all the other legal and tax obligations of being a new landlord.

I’m a new landlord. How can you help me?

If you’re a new landlord, and you’re planning to earn income from one or more buy-to-let properties for the long term, we can help you as long as we handle your annual Self-Assessment Tax Return.

THP is a landlords’ accountant and can advise you on everything from reducing your tax bill and whether you would benefit from setting up a limited company through to strategies for increasing your rental income.

We can also help you understand your mortgage obligations. So if you’re letting out your property without the correct mortgage, talk to us sooner rather than later to avoid penalties!