Accidental landlords are caught in high-rate trap as they fail to tell bank about tenants

Published 07th Mar 2012

Accidental landlords are being stung with more expensive ‘let-to-buy’ mortgages as lenders take advantage of desperate sellers unable to move.

The stagnant housing market means frustrated vendors are being forced to rent their homes against their wishes, while they try to buy elsewhere in the meantime.

But many fail to tell their lender about having tenants and, if found out, can face higher punitive rates when forced to change their mortgage type.

David Hollingworth, director at mortgage broker London & Country, warns: ‘You must tell your mortgage lender before renting out your home. Otherwise you are breaching the terms of your contract.

‘Banks have different policies, but it’s likely you will have to move on to a slightly more expensive rate.’

Before the credit crunch, banks were more relaxed about so-called ‘consent to let’. But these days borrowers can be refused outright, or charged a higher rate. Some lenders will not let homeowners rent out their property.

Coventry BS says it ‘depends on the circumstances’. Others, such as Lloyds TSB and Cheltenham & Gloucester, have specific ‘consent to let’ mortgages, although both banks say an accidental landlord can stay on their residential mortgage until their early repayment charge expires.

Platform, part of the Co-operative, also has ‘let-to-buy’ mortgages specifically designed for people who have become accidental landlords. The mortgages could be useful if someone’s existing lender will not allow them to rent out their home, but they can be expensive.

Platform says a fifth of its applications from landlords are for let-to-buy. Its let-to-buy two-year fix is at 5.09 per cent with no fee for those with 40 per cent equity. Interest-only payments on a £150,000 mortgage would be £636 a month.

Investors can get a slightly cheaper buy-to-let two-year fixed rate at 4.99 per cent, also with no fee. Interest-only payments would cost £624. Ordinary homeowners can get a two-year fixed rate at just 3.29 per cent with the bank, giving interest-only payments of £411.

Accidental landlords are often charged higher rates than professional landlords because they are seen as a higher risk by lenders. Nationwide customers who become accidental landlords must ask the society for permission and, after this is given, pay a £50 fee.

For the first six months, there is no other charge. After six months, the mortgage interest rate will increase by 1.5 percentage points. This means someone with a £150,000 interest-only mortgage currently on Nationwide’s SVR at 2.5 per cent, paying £313 per month, would see payments jump to £500 per month if they were paying 4 per cent — that’s an extra £287 per month.

Mr Hollingworth adds: ‘There is huge variation among banks when it comes to accidental landlords. It’s important to factor in the potential increase in mortgage costs when deciding whether to let your home.

‘You should also think about the rental voids: how will you pay the mortgage when there are no tenants in the property?’

Many frustrated sellers have decided to hold off until the housing market picks up. But experts warn that people could be waiting a long time.

Properties are now on the market for an average of 105 days, compared with 80 days in April 2011, according to property website RightMove. Although there has been a small surge of activity recently, this is largely because the stamp duty holiday for first-time buyers expires on March 24.

Yesterday, Halifax said house prices fell 0.5  per cent in February compared with the previous month. It means prices have dropped 1.9 per cent in a year.

Howard Archer, chief economist at IHS Global Insight, expects house prices to fall 3 pc this year. ‘Despite the recent pick up, housing market activity is still low compared to long-term norms,’ he says.

‘Unemployment is high and likely to rise further, earnings growth is muted and the outlook is uncertain.’

Source: ' ThisIsMoney '

View All Latest Articles