So-called “accidental landlords” are being hit with higher mortgage costs, as lenders continue to make it more difficult for existing borrowers to let out their homes temporarily.
In recent years, more homeowners have become first-time landlords as they have been unable – or unwilling – to sell their houses in a depressed market, and turned to letting their properties until prices improve.
Figures from the Association of Residential Lettings Agents show that, in the first quarter of 2012, 40 per cent of its members reported a rise in the number of rental properties coming on to the market because they cannot be sold.
Research from Paragon, the buy-to-let lender, also found an increase in the number of first-time landlord mortgages being processed by brokers – from 18 per cent at the beginning of 2011 to 23 per cent in 2012.
While most banks and building societies still allow existing customers to let out properties on a short-term basis – known as “consent-to-let” – some lenders’ terms and conditions have become stricter since the economic downturn.
“Before the credit crisis, it was fairly easy to get consent to let your property and most lenders would allow you to stay on your existing mortgage rate,” noted David Hollingworth of London & Country.
But many now charge higher rates and fees, with some lenders refusing consent altogether.
Some lenders have also sought to crackdown on borrowers who have rented out their property without seeking permission first. Last year, both Clydesdale Bank and Lloyds Banking Group started writing to customers that they suspected of letting their homes to warn they were in breach of their mortgage terms.
Nigel Bedford of Largemortgageloans.com, the mortgage broker, said he has come across several lenders being “more reluctant” to grant consent to let in recent months.
One of his clients who wanted to let a property was given consent by Nationwide Building Society but only on condition that the mortgage interest rate would rise from 2.5 per cent to 4 per cent.
Nationwide will typically allow borrowers to rent out a property for six months without charge – but where the letting period is longer, customers now have to pay a £30 fee and an extra 1.5 percentage points of mortgage interest. Customers who agree can then rent a property for up to three years. Previously, Nationwide did not make any extra charges for letting out a property.
HSBC and First Direct will agree to a letting period of up to 12 months, with no fee or higher rate – but borrowers will have to move to buy-to-let terms after 12 months.
Clydesdale Bank is one of the only big lenders that will not give consent-to-let at all – except for those in the armed forces. Customers who want to rent out their properties have to pay any early repayment charges that apply and then move to a more expensive buy-to-let mortgage rate. “There is no flexibility at all,” said Adrian Anderson of broker Anderson Harris.
Other lenders are reluctant to give consent. A spokesman for ING Direct said letting is not something the bank encourages, although it will allow it in certain circumstances – such as a sudden job move or overseas posting. In these cases, a borrower can stay on the existing mortgage rate and there are no additional charges.
Mark Harris, of broker SPF Private Clients, believes Lloyds Banking Group brands have also got a lot tougher on consent-to-let recently.
Borrowers who are granted permission have to move to a more expensive consent-to-let rate. For example, it offers borrowers with a 25 per cent deposit a three-year fix at 5.99 per cent, with a £999 fee.
Brokers point out that cheaper buy-to-let rates are available in the market. For example, Abbey for Intermediaries, part of Santander, offers a tracker rate of 4.24 per cent with a £1,495 fee.
Some lenders will only give consent to those with a large amount of equity in their homes. Northern Rock, for example, will only allow borrowers with an outstanding mortgage of 70 per cent loan-to-value to let their homes for a period of 12 months. It charges a £100 fee and the rental income needs to cover 120 per cent of the mortgage interest.
Aaron Strutt of Trinity Financial, the mortgage broker, says most mortgage lenders are still reasonable when it comes to allowing borrowers to let their properties temporarily.
Hollingworth agrees. “It is still possible to get consent-to-let, but borrowers will find it won’t be such an easy shrug of the shoulders as before. More questions will be asked by the lender.”