Rent out your home as a buy-to-let

Find out how to let your property as a buy-to-let, without the expense of becoming a buy-to-let landlord.

What can you do if you're desperate to sell your home, but don't want to take a hit by selling in today's depressed market? What if your home is worth less than your mortgage? What if you simply can't sell it?

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Letting it out to tenants could be a decent alternative. But did you know you can do that without the rigmarole of becoming a buy-to-let landlord?

Instead, you could become one of the growing army of so-called 'reluctant' landlords who are renting out their own homes in order to buy or rent somewhere else. In fact, brokers at the lovemoney.com mortgage service are seeing a distinct rise in this type of enquiry.

The trouble is, if you have a mortgage on your property and you want to let it out then you must get permission from your lender in the form of 'consent to let'. If you don't, you'll be in breach of your mortgage agreement. If your lender finds out, you will be probably contacted to arrange a formal consent to let and could be charged a penalty retrospectively.

Consent to let versus buy-to-let

Unlike buy-to-let, consent to let is really only for borrowers who want to let their property on a short-term basis. This would apply if, for example, you want to sell your home but you would prefer to wait until the housing market has recovered.

Other commons reasons include borrowers who want to go travelling for a time, and those who need to relocate with their jobs. Consent to let isn't generally used where you want to let out a property for investment purposes.

For this reason, if you're given consent to let you can normally stay on your existing mortgage deal and pay interest at your current rate. This is a key advantage, because if you had to remortgage to a buy-to-let deal, you'd find the rates are significantly higher than residential home loans.

On top of that, buy-to-let mortgages require a relatively low loan-to-value or LTV ratio. The LTV is the mortgage loan as a percentage of the value of the property. However, with consent to let, the LTV isn't usually taken into consideration. So, even if you're in negative equity you should still be able to rent out your home.

The consent to let market

Unfortunately, to make matters complicated, each lender has its own take on consent to let cases. In the tables below, I outline the rules from some of the UK's largest lenders:

Which lenders allow consent to let?

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So Nationwide, Northern Rock and Royal Bank of Scotland come out on top for reluctant landlords, while First Direct and Yorkshire Bank will force you to switch to a buy-to-let deal, which will typically have higher rates.

In Halifax's case borrowers have two options: Firstly, to stay on their existing mortgage deal with a consent to let. Or secondly, to take out a specific consent to let deal - called a 'consent to lease product' by the lender - with its own rates and fees. These rates start at 5.09% with product fees starting from £599. You would also have to pay any Early Repayment Charge or ERC that's applicable on your current mortgage deal in order to switch. So it's unlikely to be a good move for you if you are tied into your existing deal.

It's important you realise many lenders will insist you move to a buy-to-let mortgage after a certain period if you want to continue letting your home.

Unfortunately, Abbey and Alliance & Leicester were the only lenders who would not disclose on what basis consent to let would be granted. If any readers have done consent to lets with these lenders, we'd be very grateful if you could share your experiences using the comment box below!

Fees and ERCs

Applying for consent to let is free at Halifax (unless you switch to a consent to lease product). It's also free at Nationwide and HSBC (if you let the property for a year or less). Other lenders charge one-off fees of £100 to £399, with the costs rising if you have to switch to a buy-to-let mortgage.

Also watch out for early repayment charges (ERCs) which may come into play, particularly if you are forced to switch to a buy-to-let mortgage after a certain amount of time (often a year). This is the case with HSBC. If you want to let your home for more than a year then you'll have to switch to a buy-to-let deal. If ERCs are applicable on your original residential mortgage at this point, then the charge will kick in at this time.

HSBC pro rata ERCs. For example, if you had two years remaining on your fixed rate deal when you switch to a buy-to-let loan, the ERC penalty would be 2%. However, if you switch with only 18 months left, the ERC drops to 1.5% and so on. With 6 months remaining the ERC will have fallen to 0.5%.

In other words, you really need to do your sums before you decide what to do.

Required LTV

Thankfully, the LTV - or equity stake in your property - isn't taken into consideration for most consent to let applications. This is great news if you have a very high LTV or you're in negative equity.

That said, Halifax will consider the LTV on a case by case basis, which could affect consent being granted. Meanwhile, Northern Rock insist the LTV is 70% or less. It's a different story again at Yorkshire Bank, where to apply for their buy-to-let range, the borrower must have at least 80% LTV if they have a repayment mortgage, or 70% LTV if they are paying interest-only.

Required rental income and letting period

How much rental income does your property need to provide before lenders are willing to lend to you? And how long can the property be rented out for?

Required rental income

In most cases, no criteria is imposed. Or, as long as the rental income covers the mortgage repayments, most lenders will be happy. This is another key difference between consent to let and buy-to-let, where the rules on rental cover are far more stringent. The only exception here is Northern Rock, which requires that rent must equal 120% of mortgage repayment on an interest-only basis.

How long can the property be let?

As I have previously mentioned, consent to let is supposed to be short-term, but not all lenders impose time limits. Nationwide and RBS, for example, allow you to rent out your property for as long as you want. While, Woolwich say a tenancy agreement can't exceed two years, but all borrowers would need to do is get in touch if they wish to let their property for longer than originally anticipated.

If you don't know at the outset how long you'll need to rent your home out, you may find these lenders are more flexible.

On average, however, most other lenders will only give you consent to let your property for one to three years without remortgaging to a buy-to-let deal.

What if, during that time, your current residential mortgage deal expires? At this point, you will probably have to switch to a buy-to-let mortgage if you want to remortgage.

Reasons consent to let may be refused

From speaking to the lenders, I get the impression that as long as you meet the general terms and conditions of the mortgage agreement, most applications for consent to let should be agreed.

However, there are some exceptions. For example, mortgage accounts must be well run. If you're in arrears, the lender may not give their permission. And some may frown upon your application if you have recently taken out additional mortgage borrowing.

If you want to let your property for commercial gain most lenders will insist you arrange a buy-to-let mortgage rather than a consent to let. And you may also find that a formal tenancy agreement has to be in place. Finally, you must intend to return to the property. Your application may well be rejected if you confess you're off for good!

A final word on insurance

I warned you earlier that you must inform your lender if you want to rent out your home. This requirement is not easily enforceable, and while we would not advise breaking your mortgage contract, the fact is, many borrowers do - and get away with it.

Having said that, you must, must, must let your buildings insurer know if you let your property out to tenants. Failure to do so will invalidate your policy. Now imagine what would happen if one of your tenants accidently burned your house down? Your insurance policy would be useless and you would be liable for all the costs of repairing the damage yourself.

Don't forget if you happen to have bought your buildings insurance from your lender it will be tricky to keep that fact that you no longer occupy the property under wraps. 

We're very keen to hear from lovemoney.com readers who have become reluctant landlords. Please let us know how you've found it using the comments box below!

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More: How to rent out your home | Buy to let mortgages in 2009