Three years ago I bought my first flat which is a one-bedroom in zone 4 in London. I have just decided to move in with my boyfriend in his flat, but want to keep hold of mine.
I took a five-year fixed rate when I bought the flat so I have two years left to go. I think I am allowed to get permission from my lender to rent it out though?
How do I do this and are there any risks I need to consider?
You may either have to stomach a higher variable rate or look to remortgage elsewhere
Andrew Montlake, of mortgage broker Coreco, replies: This is something that has become really common over the past few years and whilst there are some definite benefits to doing this, such as the expected increase in property values in the long-term and the fact that you can earn additional income from renting the property, there is an awful lot to take into account before you do.
The actual act of obtaining consent to let from your lender is relatively simple.
All you have to do is contact them with a good reason as to why you want to do this – your reason is perfectly legitimate – and in most cases, it will be granted.
Some lenders do reserve the right to refuse or even load your mortgage rate but these days that is rare.
Before you do this, however, you need to consider what many people miss: this can affect your mortgage going forward and it could even effectively turn you into a so-called mortgage prisoner.
The issue arises when your current mortgage product comes up for renewal as once your property is let out, some lenders will not allow you to transfer onto a new residential product at the end of your existing product term.
Therefore you may either have to stomach a higher variable rate or look to remortgage elsewhere.
This means looking at a buy-to-let mortgage, which comes with a whole new set of rules and regulations.
Dependent on your tax position, as a rough rule of thumb the rental income has to cover the monthly mortgage interest payments at an assumed interest rate of 5.5 per cent times by 145 per cent.
Different lenders have different calculations, but it may well be that as a result the rental income you are receiving does not fit your lender’s criteria to cover your existing mortgage amount.
Some lenders will be able to adopt a ‘top-slicing’ policy if you have sufficient income left after your existing monthly outgoings are taken into account to cover any rental shortfall.
Keeping your existing property will also have an effect when it comes to buying a new property together.
It will have an impact on your level of affordability, as a lender may take into account any costs associated with keeping the property and also you will have to pay an additional 3 per cent stamp duty on your new property as you will end up with more than one property.
Then you have the whole minefield of renting your property.
As a landlord these days there are literally dozens of rules and regulations to follow, not least the fact that the property needs to meet new energy performance rules, as well as ensuring your property is safe, changing your buildings and contents insurance, protecting your tenant’s deposit and even checking your tenant’s right to rent, to name but a few.
Also, the rental income you receive may push you into a higher income tax bracket and potentially mean you lose the right to certain benefits you may have been eligible for.
The long and the short of it is that you should be looking at taking some professional advice, from both a tax adviser and mortgage adviser to ensure that you are not left in the lurch when the time comes to review your mortgage requirements.