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Do you have to change your mortgage to rent out your property?

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If are planning to move and rent out your old home, a common concern is what to do about your mortgage. Many people do not realise that it is usually a condition of any residential mortgage that you need to let your lender know if you wish to rent your property out.

It will then be up to the lender to decide what they want you to do. Generally, they will be under no obligation to allow you to keep your existing mortgage deal if you will be renting the property out.

While some lenders will allow you to keep your existing mortgage, they will likely want you to pay a higher rate of interest to reflect the property’s change of use. However, many lenders will require you to remortgage and switch to a buy-to-let mortgage. This will often attract a higher rate of interest and come with different conditions to a standard residential mortgage.

How buy-to-let mortgages work

Buy-to-let mortgages are generally offered on an interest-only or repayment basis. If the mortgage is interest-only, you will need to repay the mortgage at the end of the loan term either by selling the house or remortgaging. Many landlords choose an interest-only mortgage to maximise their monthly return on the property.

Something to be aware of is that how much you can borrow will usually be determined by the lender’s estimate of how much rent the property will generate each month. Most lenders will require the monthly rental income to equal at least 125% of the monthly repayments.

You may also be required to have specific insurance policies as a condition of your mortgage, including rent guarantee insurance to cover the cost of your repayments if you are ever unable to collect rent for any reason.

It is also important to remember that when you sell the property, you will likely be liable for capital gains tax. This is normally equal to 20% of the profit you make from selling the property, so can be significant.

What happens if you fail to notify your mortgage lender about renting out your old home?

If you do not let your mortgage lender know that you are now renting out your old home, you will be committing mortgage fraud. This is a criminal offence and could see you facing prosecution. In most cases, if your lender finds out that you are renting out a property on a residential mortgage without informing them, they will foreclose on your mortgage, forcing you to sell the property or try to find some other means to repay the mortgage.

Need help remortgaging to rent out your property?

Bird & Co Solicitors is a long-established law firm offering commercial property services to landlords across England and Wales from our 3 offices in the East Midlands. We can help with all aspects of being a landlord and buy-to-let property, including remortgaging to buy-to-let mortgages.

To find out more about our commercial property services, call us today on 01476 591711 or use our contact page to find details of your nearest office.

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