My mortgage lender just told me I have to pay an extra 1.5 per cent mortgage interest if I rent out my house. Do I have to tell it?
Simon Lambert, of This is Money, replies: With property transactions having slumped and mortgage lenders demanding hefty deposits for good deals, more homeowners are deciding that it would be a better plan to rent to move, rather than sell up.
This involves renting out your own home, so that you can rent another and means owners can try to ride out the property slump and also avoid the sky-high costs of moving.
Unfortunately, mortgage lenders’ response to those increasing numbers of people wanting to rent out their home so that they can move has been pretty disappointing.
Where previously many simply granted consent-to-let and perhaps charged a small administration fee, now they often demand a hefty rate premium and have started charging ever larger fees.
In some cases, lenders are even forcing borrowers onto expensive buy-to-let deals if they want to rent their home out for longer than a short period of time. Please that owners need to rent their property out to move for work or family reasons, tend to fall on deaf ears and banks are demanding fees across the board rather than assessing individual circumstances.
This seems pretty mean spirited, when many of these banks and building societies had previously happily indulged in the reckless lending boom that triggered the UK’s housing slump and thus made it difficult for people to buy and sell.
The excuse usually given for this is that rented properties carry a different risk profile to owner occupied ones in terms of mortgage default, however, that doesn’t always stack up when lenders make hefty demands from those with large amounts of equity, or this the owner’s only property and still on a repayment mortgage.
That makes it very tempting for homeowners to just not tell their lender and rent out their home anyway. After all, thousands of people do this every year and we all probably know a bloke down the pub who will tell you he has done so.
The problem is that if you do this you are in the words of the Council of Mortgage Lenders, ‘to all intents and purposes committing mortgage fraud’.
When you signed your mortgage contract, the terms and conditions almost certainly said that if you wanted to let your home out you must seek permission. They will probably have allowed the lender to vary the fee or rate it charges for this and if it was a recent mortgage it may even clearly spell out those charges.
If you break this agreement and the lender finds out, then you are at their mercy. They may just make you pay the consent-to-let fee and higher rate, but they could change your mortgage conditions, recall the debt, or put a black mark against your name saying that you have been refused the right to have your mortgage continue. That final sanction would spell bad news for getting another one.
The other big problem is that if you let out your property with normal residential home insurance then it will not be valid – and that is very bad news if your house burns down. Rental properties need specific landlord’s insurance policies, if you don’t have one or permission from your insurer to rent out your home then a claim can be turned down.
Don’t forget that you must also pay tax on income derived from rent, although you can offset mortgage interest costs against this, and Capital Gains Tax is levied on the sale of any property that is not your Principal Private Residence once you have not lived there for three years.