If you are paying a mortgage for a large home and you meet an interested tenant, you may ask yourself: can I rent out my house without telling my mortgage lender? It can be tempting, sure, and even more so if you can get help paying down your mortgage by doing so.
You are not alone when it comes to having these thoughts.
As property prices reach the sky, many homeowners are looking for innovative new ways to transform their residential property into a money-making machine.
You have every right to rent out your home. Just don’t do it before notifying your mortgage lender. Failure to do so can lead to grave consequences for you.
The Consequences of Becoming an Accidental Landlord
Even though you own the property in name, it doesn’t truly become yours until after all the mortgage is paid — which means if you lend it out to someone else, you may very well be violating the terms of your mortgage contract.
So what exactly happens if you ask and answer the question “can I rent out my house without telling my mortgage lender?” and forget or neglect to tell your mortgage lender about renting out your home?
Mortgage lenders see a buy-to-let property as a riskier investment. That’s because they see the potential of the property being vacated for a time, like when a suitable tenant cannot be found. This will result in a loss of income for the property owner.
Additionally, mortgage rates are significantly higher than rental rates so paying that will eat out any profit that the homeowner makes. This means that depending on a tenant may result in problems with mortgage repayment.
Also do not delude yourself into thinking the mortgage lender won’t find out. Something as simple as your tenant returning mail with your name can trigger red flags.
Banks and financial institutions are also coming up with increasingly sophisticated ways to track down “accidental” landlords, reportedly including a complicated data shifting method that catches tax avoiders.
So what exactly happens if your lender finds out you have been hiding a tenant from them?
Usually, you will be in breach of your contract. After all, you were granted mortgage under the assumption that your property will be occupied by you. However, once you get a tenant, this will no longer be the case.
In this case, you will have no one but yourself to blame if the mortgage lender demands full repayment of the mortgage amount you have borrowed and have you evicted. For most people, this would be impossible.
You will most probably get a black mark on your credit history making it difficult to secure financial aid in the future.
If your mortgage lenders are feeling magnanimous, they may allow you a change in the status of your property along with a heavy penalty and a limit on how long you can rent out your property for. You may also have to pay administration and arrangement fees.
Additionally, damages to the property made by a tenant are not covered under regular property insurance and your insurer may simply refuse to pay for it. That’s why you will also need to take out a landlord’s building insurance.
Consent to Let
Personal circumstances can change at any time. You may not have set out to become a landlord, but unavoidable circumstances may have forced you to take in a tenant. These can include moving in with your partner and not wanting to sacrifice the investments you already made to your home. You may also have shifted to a different location but figured out it wasn’t a good time to sell your house.
Whatever the reason for you renting out your property, the key is that you should ask your mortgage lender for a “consent to let.” This essentially grants the homeowner the permission to let out their property for a particular period of time, typically until the end of a current tie-in period.
The consent to let usually comes with a few strings attached. Although conditions vary from lender to lender, some stipulations remain common. These include:
- Your mortgage lender may insist you make an upfront payment of your mortgage for at least six months to mitigate any risk to them.
- Properties that are rented out while they are still on mortgage typically have higher interest rates than residential property mortgages. This means you will have to face a rise of 1% to 2% mortgage as well as pay administration fees. Some homeowners may also be required to prove they can pay the mortgage even if interest rates were to rise higher.
- You will also need to fill out a comprehensive application form that will have all the details, including your reasons for renting out your home, expected tenants, and potential of earning.
Keep in mind though that the reason for renting out your home must be genuine. If you always intended to rent out your property while it was on mortgage, it may delay or reject your application.
How to Stop Yourself From Committing Mortgage Fraud
In order to prevent yourself from running afoul of your mortgage lender, here are a few things to consider:
Evaluate Your Mortgage Contract
Before you decide to rent out your home, it should be your priority to dig out your mortgage contract and read through its terms and conditions. Make sure you read the fine print to understand if the mortgage lender has added any stipulation that would restrict you from lending out your property, such as phrases like the property would be owner-occupied.
Even if you see nothing written in the contract that implies that you cannot rent the property, you should still confirm it with your mortgage lender, just to be on the safe side.
If you have trouble going through the legal jargon, you can consult with a mortgage lending or real estate professional.
Call Your Mortgage Lender
Once you have gone through all of your mortgage contract, make a call to your mortgage. This is the right time to inform them of your decision to take in a renter — not until the tenant is already living at your place.
You can say that you are considering moving and would like to retain your home but use it as a rental property instead. Make sure you get the name and contact numbers of your mortgage officers who need to be notified if you rent your home.
Review Additional Requirements
Make sure you also understand all the additional requirements that will come from changing the status of your property. Your mortgage lender may ask you to take out additional landlord insurance coverage. They may also ask that you inform your tenants that they need to get rental insurance before they can move into your house.
One of the most important reasons why you need to notify your mortgage lender of your plans is regarding your mailing address. Assuming you will no longer be living in the property along with your tenant, you will have to ask your lender to direct their correspondence to another address so that you do not miss out on critical messages and your highly confidential financial information does not fall into your lenders’ hands.
Additionally, you should also ensure that you have the resources to cover the mortgage payment in the event that your property remains unrented for a period of time. Make sure you get everything in writing from your renter in case your lender has any questions.
So before you catch yourself wondering, “Can I rent out my house without telling my mortgage lender?” just know that informing your mortgage lender that the purpose of your property has changed is vital. The terms and conditions in your primary mortgage contract will lay out whether you can rent out your property or not. If you fail to inform them of a let, it can be disastrous for you.
Even if they do allow you to change the status of your property, make sure you do not rely too much on your rental income to pay for the mortgage. There may likely be a time when your property sits unrented and this is when smart financial planning can ensure you do not miss out on making payments to your mortgage lender.