In the UK, residential mortgages are intended for homeowners who plan to live in the property they purchase. If you are caught renting on a residential mortgage, there could be serious consequence.
What Is a Residential Mortgage?
A residential mortgage is a loan given by either a building society, a bank or a homeloan company, its purpose is to allow the prospected buyer to purchase the house they intend to live in.
Residential mortgages usually have lower interest rates, as they are for individuals, compared to a buy-to-let mortgage, which is intended for profit rather than residence.
When taking out a residential mortgage, the rules set out by the lender state that the property must be the main residence of the buyer.
If you need help finding a residential mortgage or want advice, try reaching out to a mortgage adviser here.
What Happens if You are caught renting on a residential mortgage?
Breach of Mortgage Terms:
If You are caught renting on a residential mortgage, you are breaching the contract signed between you and the lender. This could result in the lender taking legal action.
Potential Legal Action:
If the lender does take legal action, they could demand that you repay the loan in full.
Unless you have the cash, would likely result in the sale of the home. In certain circumstances, they could repossess the property completely.
Higher Interest Rates or Fees:
If you’re fortunate, you may only have to pay higher interest rates or fees.
Since the property is now essentially a buy-to-let, the lender would likely change the mortgage product to reflect this.
Impact on Future Mortgage Applications:
Lying to the lender could impact your internal credit score, and most banks communicate with each other.
This could result in you being blacklisted, making future borrowing more difficult.
Why Do Lenders Care About Renting on a Residential Mortgage?
When assessing you for a mortgage, the lender considers multiple factors such as the property, location, and the applicant. When they offered the mortgage to you, it was based on your risk profile, not that of new tenants.
If the new tenants miss payments or refuse to pay, which is more common than you might think, this could result in missed mortgage payments.
Another factor to consider when renting out the property is that it changes the legal status of the property.
This can lead to problems regarding insurance and tax implications.
Lenders also have a responsibility to ensure that the terms of the mortgage are adhered to, as they want to maintain the integrity of the mortgage market.
How Can I Rent Out My Property Legally?
If you want to rent out your property on a residential mortgage, the first thing you want to do is contact the Lender.
Contact Your Lender: Usually, a lender will be happy for you to let out your residential property if it has been at least 6 months, as long as there is a valid reason and it doesn’t appear that the sole purpose of the mortgage was to rent the property.
You should ask the lender for consent to let, which will allow you to rent the property out.
Consider Switching to a Buy-to-Let Mortgage: If you plan to rent the property long-term, switching to a buy-to-let mortgage can be a good option.
Buy-to-let mortgages have different terms and interest rates and they provide legal protection for both the lender and the borrower.
Obtain Proper Insurance: When renting out a property, you’ll need landlord insurance, which covers different risks compared to standard homeowner insurance.It will ensure your property is covered in case of damage, theft, or liability issues with tenants.
Follow Legal Requirements: Renting out a property comes with various legal obligations, including registering with a tenancy deposit scheme, ensuring the property meets safety standards, and providing tenants with specific legal notices.
Final Thoughts
Renting out your home while on a residential mortgage without informing your lender can lead to serious consequences.
This includes legal action, increased interest rates, and an impact on your credit score. If you’re considering renting out your property,
It’s essential to speak to your lender and explore legal routes.
Request a consent to let or switching to a buy-to-let mortgage. Always follow the legal requirements to ensure a smooth and hassle-free rental process.
FAQ’s
Can I rent out a residential mortgage property?
Only if your lender gives you permission, usually in the form of “consent to let.” Otherwise, it’s likely a breach of your mortgage terms.
What happens if I rent out my property without telling my lender?
You could be in breach of your mortgage contract. This might lead to penalties, increased interest rates, or even your mortgage being called in.
What is ‘consent to let’?
Consent to let is temporary permission from your lender to rent out your home while you still have a residential mortgage.
This will allow renting on a residential mortgage.
Can I switch to a buy-to-let mortgage instead?
Yes, if you plan to rent long-term, it’s often better to switch to a buy-to-let mortgage. You’ll need to meet the lender’s criteria and possibly pay fees.
Will my lender find out I’m renting without permission?
Possibly. If a tenant contacts them or mail is redirected, also, it can raise red flags. Insurers and utility companies may also notify lenders.
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