Can You Rent Out Your First Home?

Renting out a home is the best solution for anyone seeking a steady income without actively working.

But can you rent your first home if you still pay its mortgage? Can first-time buyers rent their property in the UK?

In this article, we’ll be looking at the details of this topic and discussing what you need to know.

We’ll also discuss legal challenges and available options and answer some common questions you might already 

be thinking of.

Let’s begin.

Can You Rent Out Your First Home If It’s Still Under Mortgage?

Yes, first-time buyers can rent out their home if it’s still under mortgage. However, the process isn’t as simple as putting up a sign and hoping for tenants to knock on your door, waiting to take up residence.

The most crucial consideration in this case is the type of mortgage your home is under. Is it bought using a buy-to-let mortgage or a residential one? This will determine how and whether you can rent out your home.

Let’s first understand the difference between the two.

A residential mortgage, as the name suggests, is a mortgage taken out to buy a home where you and your family will live. 

In such a mortgage, you must pay at least a 5% deposit, while the rest you can take as a loan. Residential loans are usually long-term, going up to 40 years.

A buy-to-let mortgage, on the other hand, is a loan taken to buy a property that you’re not going to live in but rent out to generate income. 

These loans have higher charges than residential mortgages. Further, buy-to-let mortgages usually require at least 25% deposit.

Now, to answer the question at hand.

You cannot rent out a property bought using a residential mortgage unless you either buy the property outright or switch to a buy-to-let mortgage. Or, as a third alternative, you can discuss about a consent to let agreement with your lender.

Not adhering to these rules can lead to repossession, eviction, or financial penalties. So, if you’ve bought your first home with a residential mortgage, you’ll either need to switch to a buy-to-let one or get a consent to let from your lender before renting it out.

What Is A Consent To Let?

A consent to let is a formal and written agreement with your lender that allows you, as the borrower, to rent out your residential property for a specific time without changing the terms of the residential mortgage.

A consent to let can be used to earn extra income, keep up with mortgage payments while waiting for your home to sell, or convert your residential mortgage into a buy-to-let one. You can also use one to rent your home while you live elsewhere or travel.

There are no fixed criteria for being eligible for consent to let, as lenders have their own specific rules. Some common ones are mentioned below:

• You must’ve been with the lender for at least 6 months or more
• You should have a clean payment record
• You should allow a fixed number of tenants on one agreement
• You should agree to a maximum length of term
• You should have garnered a certain level of equity in your home

Remember that even if you fulfil all the terms, lenders are well within their rights to refuse your consent.

How To Switch Residential Mortgage To Buy-To-Let?

If you can’t get your lender to agree to a consent to let or plan to rent out your home long-term, you’ll need to switch your residential mortgage to a buy-to-let mortgage.

A residential to buy-to-let switch is standard practice when moving to a new home, travelling abroad, or planning to stay away from your home for a long time.

Your lender will calculate your home’s LTV and ICR to assess how much you can raise on it. Most lenders also ask for a rental income of at least 125% over and above the monthly interest-only mortgage payment. If your monthly mortgage payment is £1,000, you must charge at least £1,250 as a rental fee.

If you don’t have any experience as a landlord and haven’t taken any buy-to-let loans before, lenders might be a bit reluctant to offer you a switch from a residential to a buy-to-let mortgage as it poses a greater risk to them. 

Further, buy-to-let mortgages have stricter eligibility criteria, and you’ll need to pay any associated fees, as explained in the next section.

How Much Does It Costs To Migrate From A Residential To A Buy-To-Let Mortgage

Following are some costs associated with migrating from a residential to a buy-to-let mortgage.

• Higher deposits of at least 25%
• Valuation or surveying fees
• Costs for furnishing the property for new tenants
• Insurance fees
• Ongoing maintenance fees

However, these costs may vary for every situation and we’d recommend connecting with a mortgage advisor for more details.

Frequently Asked Questions(FAQs)

1. Is renting out my first home legal without informing my lender?

No, renting out your home that’s under mortgage without informing your lender is considered a breach of contract. If you do this, the lender may take legal action, leading to repossession or fines.

2. Is informing the HMRC when I rent my first home mandatory?

Yes, it is mandatory. You may also need to register for self-assessment, declare your rental income, and pay any tax due.

3. What insurance would I need to rent out my first home?

Typically, you’d need landlord insurance to rent out your first home. This type of insurance will cover the property and its contents, liability insurance and loss of rental income.

4. Is seeking legal or financial advice necessary before renting my first home?

We recommend doing so. This will ensure that you understand all legal obligations, comply with all regulations, and can make informed decisions regarding taxation and mortgages.

5. How do I calculate my potential rental income?

Your potential rental income will depend on your property’s location, condition, and local rental market rates.

6. How long after buying a house can you rent it out in the UK?

This depends upon the lender, as some impose a waiting period of six to twelve months after buying a home with a residential mortgage before you can switch to a buy-to-let or consent-to-let.