Mortgage lenders are clamping down on accidental landlords who do not tell their bank that they are renting out their homes.
Lenders are wary of these investors, who aren’t being honest about letting properties, in an attempt to avoid higher interest rates or a move to a more expensive buy-to-let loan.
In an intensive campaign to find out who is mistreating the system, banks are going through the electoral register, social media, and online letting agencies for any indications that a house is up for rent.Despite strong recovery in the housing sector, many people are still in negative equity, and are therefore unable or unwilling to sell their home. Lots of these become accidental landlords; there could be up to 30% in the landlord market
Lenders have managed to take advantage of this by raising rates or requiring these landlords to change from a residential loan to a higher buy-to-let loan. This drastically increases monthly repayments for the borrower.
A large amount of borrowers have attempted to avoid this, by not telling their mortgage provider that they are renting out the property. Lenders have caught onto this and are now chasing the wrongdoers.
A broker with John Charcol, Ray Boulger, says: “We know there are many borrowers who have let their property but failed to inform their lender. Before the financial crisis lenders didn’t often check whether borrowers were still living in their property, but they are increasingly doing things like checking the electoral register to see who lives at an address, and looking on letting websites such as rightmove.co.uk, to see if a property is listed. These borrowers now run a much greater risk of being caught.”
It is a contractual requirement of borrowers to inform their lender if they would like to let a property. If they decide to do so, they could see a rate increase between 1% and 2%, plus an administration fee.
This rise is because mortgage providers see buy-to-let properties as more risky, because of possible void periods, or tenants falling into arrears.
Boulger explains: “If a borrower has 20% equity in their home, they have the option to move to a more competitive buy-to-let mortgage with another lender. But for those in negative equity, they are stuck with their existing lender and must accept whatever they offer.”1
Lenders deal with this in many ways. Nationwide, for example, increase their rates by 1.5% points for all residential borrows who rent out their homes for over six months. An administration fee of £30 is also charged.
The Co-operative Bank raises interests rates by 1% point. They also charge a £55 fee for transferring the mortgage to a letting arrangement.
HSBC does allow their customers to remain on their residential mortgage rates if they are letting their property out for 12 months or less. If the period is longer, customers are expected to remortgage to a buy-to-let deal.
Two options are given by Barclays, who says that customers can swap to a buy-to-let mortgage before renting the property out, or can apply for consent to let. This will allow the home to be let for up to two years, with no change to the rate.
Santander are also considering consent to let requests for short-term arrangements. These borrowers will stay on their existing mortgage, but a fee of £295 is charged. For an extended period of letting, borrowers need to move to a buy-to-let mortgage.
Smaller lenders, such as Chelsea Building Society and Accord Mortgages enforce penalties on those borrowers that don’t let them know they are letting out their property. The rate for borrowers with consent to let is raised by 1% point, however the margin increases to 2% points if they are letting without permission.
Letting out your property without telling your mortgage provider is very risky. It breaches the terms and conditions of the contract, and lenders could potentially demand full and final repayment, which would mean borrowers had to default on the loan.
Mortgage broker Coreco’s Andrew Montlake says that letting a property without permission invalidates home insurance policies as well.
“Mortgage lenders are getting tough on this and I would encourage borrowers to be honest and upfront with their lender,” he advises.1
Another broker, Aaron Strutt of Trinity Financial, adds: “If the lenders want more of their customers to tell them that they are letting their properties out, many of them should not be so quick to raise their rates. Many homeowners don’t want to let out their property, but they do it to ensure the mortgage repayments are kept up to date. At the moment, honesty is costing some homeowners a lot of money.”1