Letting your house without a buy-to-let mortgage is high risk (so do this instead)

The number of accidental landlords is on the rise as vendors bide their time and delay selling until the property market improves, renting out their home and moving elsewhere in the meantime.

Homeowners upsizing or moving in with a partner also frequently choose to retain their original flat or house and try their hand at being a landlord. 

But those choosing to rent out their home for the first time risk the wrath of their mortgage lender if they neglect important housekeeping. 

Residential mortgage offers include a clause stating that the property cannot be let out without the lender’s explicit permission – failing to inform the bank before letting a property would breach the terms and conditions of the loan.

Is it illegal?

Technically, yes. Failing to notify your bank about letting a property out may seem like a small inaccuracy, but lying to a lender for financial gain is a breach of contract. This constitutes mortgage fraud, which is a criminal offence. 

In reality the chances of being prosecuted for mortgage fraud of this sort are small, but lenders are not willing to turn a blind eye and the repercussions could be financially ruinous. 

A bank or building society is entitled to demand instant repayment of the entire mortgage if it finds a borrower is letting a property without permission – and this does happen, with the added sting of early repayment charges on top. It will also spell disaster for a borrower’s credit file and make them a very unfavourable borrower for any future mortgages. 

It may be tempting to take the view that a lender is unlikely to discover you are letting a residential property. However, banks and building societies have developed increasingly sophisticated methods of catching out armchair buy-to-let investors. 

The bottom line is that borrowers should always alert their mortgage lender if they intend to rent out a property. There are two main ways to go about this, depending on the length of time you intend to let.

‘Consent to let’

If your stint as a landlord is likely to be a short one, asking your lender for consent to let could be the best option. Permission in writing is the only way to let out a property while staying on a residential mortgage.

Many banks and building societies will consent to let on a short-term basis, typically two years, said Ray Boulger, of mortgage broker John Charcol.

Mr Boulger said: “This can be a good short-term option, especially if the intention is to retain the property for a relatively short period pending a sale, perhaps to allow more flexibility on the timing of a sale.” 

Retaining a residential mortgage can avoid incurring any early repayment charges, which can run into thousands of pounds, and allow the borrower to stay on their current interest rate. 

Mr Boulger said: “The lender will probably charge a modest admin fee, but this will be much less than most arrangement fees for a new mortgage.

“However, a downside is that you will not be able to extract any equity from the property to add to the deposit for any new purchase during that time.”

Switching to a buy-to-let mortgage  

Homeowners planning to rent their property out on a longer-term basis will need to switch from a residential mortgage to a buy-to-let deal. This will be necessary even if the existing lender initially gave consent to let.

Buy-to-let loans are typically more expensive and have higher interest rates than residential deals. 

But unlike residential mortgages, the majority of landlords repay their loans on an interest-only basis – meaning monthly payments could well be lower after switching to a buy-to-let loan, although the full loan amount will be outstanding at the end of its term.

Mr Boulger said: “One of the benefits of switching to a buy-to-let mortgage straight after moving out of the property is the chance to increase the loan size to provide a bigger deposit for a new residential property.”

A bigger deposit unlocks lower interest rates and can save borrowers a substantial amount over the course of a mortgage deal.

Mr Boulger added: “Managing a buy-to-let mortgage and new residential deal can be quite complicated. 

“A good mortgage adviser will work out the best split, taking into account that the maximum size of the buy-to-let mortgage will normally be limited by rental income.”

This article was first published on April 8 2023 and has since been updated.