Many property owners are looking for short term solutions to help them with problems paying for a mortgage owing to changed circumstances, and particularly in the current economic conditions where selling the property is no an option. Renting out your home could be a last resort to solving financial problems if you are struggling to pay your mortgage. If you are struggling to pay your mortgage, a last resort is to move out and let the property to cover your repayments and move into a flatshare, or even back with parents at a low rent, to free up income for other priorities.
Sally Machin, Operations Manager at Belvoir Lettings Agency Kettering, confirms that the process is not straightforward, however, and involves significant short-term costs. Here, she, rounds up the main financial factors to consider.
· Do your homework
The reality is not a step-by-step process, as the following sections may suggest. Before starting, it is important that you ask Belvoir for estimates of your property’s potential rental income and research the costs of renting in your area so that you can work out how much money you should be able to save. Also, if the property is leasehold, you may need the freeholder’s consent.
· Notify your lender
The first big step is to speak to your lender about your intention to let, because letting without doing so will put you in breach of your mortgage’s terms and conditions. Melanie Bien, of Private Finance, the mortgage broker, says that banks and building societies have tightened their rules on “consent to let” in recent years, but that most of them will be understanding. The process is likely to be easier for people who intend to move out for a short period of one or two years. HSBC, for example, allows customers to let for up to a year on their existing mortgage at no cost.
Some lenders may allow you to let for longer only if you have a loan-to-value ratio below, say, 75 per cent and if rental income would cover 120 to 130 per cent of the mortgage repayments.
If you do receive the go-ahead, some lenders may allow you to let with your existing mortgage on payment of a smallish fee. For example, Northern Rock charges £250. Others may require you to transfer to a buy-to-let deal. For instance, HSBC says that it will “discuss options” for lets of more than one year case by case.
Nationwide Building Society keeps borrowers on their existing deals, but it requires payment of an additional letting interest rate of 1.5 per cent after the first six months “to reflect the additional risk and cost to the society”.
Whatever the policy, Sally explains that you should approach your lender confidently, not emphasising any financial difficulty. “But if they aren’t helpful at all, and as a last resort, make it clear that you might otherwise lose your home and that it should be treating customers fairly.” Treating customers fairly is not mere jargon, but a requirement of the Financial Services Authority (FSA).
· Upgrade your cover
If you do obtain consent, it will be subject to conditions. For example, you will have to have valid insurance. Julie Owens, of Moneysupermarket.com, the comparison website, says: “Your existing home policy will be invalid when you start earning from your property. Landlord insurance need not be any more expensive than general home cover, but it will provide adequate protection should anything go wrong with your property or should you have any problems with your tenants.” Belvoir’s Sales Manager, Rachael Houghton, can advise on a quality insurance policy for Landlords and covers accidental tenant damage and can insure your rental payments and even pay for legal costs, should action need to be taken against your tenants.
· Get tenants in
Lenders will require you to let your property on an assured shorthold basis. Chris Norris, of the National Landlords Association (NLA), says that anyone not familiar with a landlord’s responsibilities, or who will live any distance from the property, should consider using a letting agent such as Belvoir in Kettering.
He adds: “If you don’t have experience of marketing, a good letting agent will make it much easier to find and keep tenants. In that sense they can provide great value, despite the cost.” Because services vary, Mr Norris suggests that people speak to agents who are members of the Association of Residential Letting Agents or the National Approved Letting Scheme, asking each to outline what they do: “A good agent should be able to outline quite a detailed schedule straight away.”
He adds that letting is more time-consuming than difficult, and that people with time to spare and administrative ability should be able to manage without an agent. Organisations such as his own (the NLA) and the Residential Landlords Association (RLA) can provide help with the legal, tax and other implications of becoming a landlord.
These organisations, and letting agents, can also advise on how to maximise rent by making changes to your home. For example, you may need to redecorate or upgrade your bathroom. You will need to decide whether to let furnished or unfurnished. There are guides to the pros and cons of both at sites such as Primelocation.com and Landlordzone.co.uk. The gist is that a furnished property is easier to let and brings in a little more rent, while an unfurnished property is easier to manage and attracts more committed tenants.
· Find a place to stay
Once you have spoken to your lender and found tenants, you will have to move out. The cheapest option for many young people will be to move back with parents, paying a token rent. Where this isn’t an option, you can rent a room or a small flat for relatively little. For example, Belvoir has properties to let in Kettering for as little as £295 a month plus bills. Please follow this link to be added to our mailing list for updates on new properties.