Question; I want to buy a property and let a room or several rooms out; is this a buy-to-let?
There are two aspects to this question; legally, any property where you, or your direct family members, occupy more than 40% of the habitable space is considered a regulated residential mortgage.
So, a buy-to-let mortgage usually precludes you or a family member from occupying the home. Except for a limited number of “regulated buy-to-let” products, which only have niche uses.
These buy-to-let products are rarely preferable as most residential lenders allow you to take a lodger or two, subject to certain limitations, and are generally less expensive.
It is vital to check with your lender if they allow lodgers, as some won’t. But most require that lodgers occupy the home as a friend and don’t have a self-contained unit like a granny annexe, although a small lock on a bedroom door is unlikely to be a big problem.
Lenders often request that no formal tenancy agreement is in place and that the lodger signs a “consent to mortgage form”. These are important to limit the lodger gaining complex legal rights to remain in the property, even in a non-payment dispute.
Where this gets confusing; is reading your mortgage offer conditions which usually state that subletting is prohibited!
This likely refers to precisely that point; making a formal tenancy agreement with a lodger can grant them rights that are prejudicial to you as the homeowner: and the mortgage lender if they ever had to repossess.
If you want to let a self-contained unit like a granny annexe, particularly with a formal tenancy; then it is hard to do this whilst remaining on the right side of the law with your mortgage lender; as most buy-to-let deals won’t allow you to occupy any part of the home, and most residential lenders won’t let you sublet any part.
If you want to purchase or part-occupy a multi-unit block (a block with several self-contained flats) then this is possible, but there are very few lenders entertaining these transactions; you will benefit from using a mortgage adviser as most of those lenders will only offer products through qualified brokers.
These are the legal aspects relating to the mortgage conditions; the second part of the question relates to health & safety, local planning bylaws, protections for tenants and insurance.
At any point where you take a lodger, it will be your responsibility to ensure that you comply with any bylaws regarding letting in your locality, which may include local licensing schemes.
You might need to get regular gas safety inspections or take alternate home insurance.
Where multiple lodgers reside with you: this may fall under requirements for houses of multiple occupation or “HMO” licensing, which can involve requirements around fire protection and electrical installations, among others.
It is vital to take all these aspects seriously. Failure to comply with HMO licensing can incur fines in the tens of thousands of pounds, and the rules are well enforced. Breaching your mortgage conditions could result in the repossession of a property.
And finally, for those in a leasehold property, you need to ensure the terms of your lease do not prohibit you from taking a lodger or sub-letting. Breaching your lease agreements can again end in repossession.
If you need help with any of these types of transactions, contact us for more information.
It has been a long time since we’ve had significant news about new products; this morning, Kensington Mortgages announced one of the most significant indicators to date; that mortgage lending is returning to normality.
Their new buy-to-let product range is available up to 85% loan-to-value even for first-time landlords; although the arrangement fees on the 85% product are 2.5%, it is still a step forward for buy-to-let landlords.
It is available on up to 3 properties, with an interest rate of 5.99% fixed for two years, and a portfolio maximum of £1 Million or three properties on the product.
Rental coverage requirements are also lower than the competition, with a rental yield requirement of 120% coverage at the pay rate; this should help to ensure that the products are viable.
The range also allows first-time landlords into the market at 80%, and at this loan-to-value, there is a flat fee product option in addition to the 2.5% fee option, which will work well for those borrowers with higher property values.
The products are available for purchase and remortgage; however, they are only available for properties in England and Wales and have a minimum income requirement of £25,000 or £30,000 above 75% loan-to-value.
For more information on these products, please call one of our mortgage advisors on 0345 4594490.
Capital gains tax is liable for gains made on certain non-exempt sales of assets at a current rate of 18%.
Your main residence is effectively exempt from Capital Gains Tax through tax relief; however, any second home or investment property will become liable for Capital Gains Tax from the date it is no longer your main home.
So if you bought a property as a second home or buy-to-let, then it is liable from the date of purchase; whereas, if you bought a property as your main home and subsequently moved to a new property letting the old one, the old property becomes liable to Capital Gains Tax from the date of transfer.
However, there is a 36-Month leeway given, so you owe Capital Gains tax on the property from 36 Months after its transfer to a buy-to-let.
Losses and expenses are offset against any gain. So keep a record of all your costs as a landlord, including maintenance bills, but not including your mortgage costs (mortgage interest is offset against income tax).
That means it is also worth having some form of valuation on the property at or around its 36th month as a let property to establish the value at its date of becoming liable.
You also have a personal Capital Gains Tax threshold of £10,100 currently, below which no tax is due, so if you are married or in a civil partnership having the property held on a “joint tenancy” or “tenancy in common” basis will allow you to use both your tax thresholds up to £20,200.
To work out any tax owed, take the sale value of the asset, less any costs and applicable tax threshold, and the value at its date of becoming liable, then multiply by 18%.
So if you let a property worth £120K in 2005 and sold it this year for £150K with costs in the four years of £3k, then you would owe £30K less £3K, less £10,100 which = £16,900 taxable gain. Then multiply £16,9K by 18%, giving tax due of £3,042.
In the same situation for a married couple where the property was held in joint names, you would instead take the gain of £30K less £3K costs, and £20,200 tax exemption giving £4,800 taxable and tax owed of £864.
Capital Gains Tax is a complex area, and there are other factors which may affect your tax liability. Remember that taxation policy can change in each government budget.
For more information or to speak to a mortgage broker, call 0345 4594490. Seek independent taxation advice for an exact analysis of your tax liability and guidance on tax mitigation.
Question; I intend to move out and let my property with a residential mortgage on it; what should I do, and is this ok?
Firstly, it’s a typical condition of almost all residential mortgage contracts that the property is not to be let without the lender’s consent. So you should always speak to your lender first and see what they say.
Most lenders will be relatively helpful with this; there are numerous reasons people choose to let what was once their home, and it’s a common occurrence.
Some lenders may want to change the mortgage contract to a buy-to-let type; others may change nothing until the current mortgage is out of its initial term.
A lender is unlikely to give you a positive response if you only entered into your mortgage contract very recently. If they did, few people would bother paying the higher interest on a buy-to-let mortgage and would take a residential mortgage and switch it a week later.
You will also need to look at your buildings and contents insurance; it will likely invalidate your policy if you are not the primary occupant.
Tenants are more likely to ruin a property than the owner, so your home insurance may be a little more expensive.
You also need to make sure you comply with all the regulations around being a landlord as regards gas inspections and using a secure tenants deposit scheme to avoid any litigation in the future. You should also investigate if any licensing schemes are applicable with your council.
As usual, if you need further information about this call 0345 4594490 to speak to a mortgage advisor about your circumstances.
