Mortgage lenders are launching a tough new crackdown on thousands of so-called “accidental landlords” who let out their own homes without notifying their bank.
Lenders have become suspicious that vast numbers are keeping quiet about their arrangements to avoid being forced on to a higher interest rate or to switch to a more expensive buy-to-let loan.
In a concerted drive to catch those abusing the system, lenders are trawling the electoral register, social media websites and online letting agencies for signs that a property has been put up for rent.
Despite strong signs of a recovery in the housing market, thousands of people are still stuck in negative equity and are unable or unwilling to sell their property. Many become so-called accidental landlords as a result: some estimates suggest they make up as much as 30% of the landlord market.
Lenders have tended to capitalise on this by increasing rates or requiring these borrowers to switch from a residential to a more expensive buy-to-let loan – significantly pushing up monthly repayments.
Ray Boulger, a broker with John Charcol, said: “We know there are many borrowers who have let their property but failed to inform their lender. Before the financial crisis lenders didn’t often check whether borrowers were still living in their property, but they are increasingly doing things like checking the electoral register to see who lives at an address and looking on letting websites such as Rightmove.co.uk to see if a property is listed. These borrowers now run a much greater risk of being caught.”
Borrowers have a contractual obligation to inform their lender if they want to let a property. Many will face a rate rise of between 1 and 2 percentage points, plus an administration fee on top.
This is because lenders view buy-to-let properties as more risky because of the possibility of void periods – where the property is empty – or tenants falling into arrears.
Mr Boulger said: “If a borrower has 20% equity in their home they have the option to move to a more competitive buy-to-let mortgage with another lender. But for those in negative equity, they are stuck with their existing lender and must accept whatever they offer.”
Lenders have very different ways of dealing with these borrowers.
Nationwide caused a stir when it announced that it would raise rates by 1.5% points for all residential borrowers who let their property for more than six months. It also charges a £30 administration fee.
The Co-operative Bank increases borrowers’ interest rate by 1 percentage point. It also charges a £55 fee for the costs of transferring the mortgage from a residential basis to a letting arrangement.
HSBC allows residential mortgage customers to stay on their existing rate if they rent a property for 12 months or less. If the rental period is longer, it expects customers to remortgage to a buy-to-let deal.
Barclays gives residential customers two options – they can switch to a buy-to-let mortgage before renting the property out, or can ask for “consent to let”. This allows them to let their property for up to two years with no change to the rate.
Santander said it would consider “consent to let” requests from residential borrowers for short-term letting arrangements. It allows these borrowers to stay on their existing mortgage but charges a £295 fee. Borrowers who planned to rent their property for an extended period would need to move to a buy-to-let mortgage in most cases.
Some smaller lenders such as Chelsea Building Society and Accord Mortgages impose a penalty on borrowers who do not tell them they are letting a property. They increase the rate for borrowers with consent to let by 1 percentage point, but the margin jumps to 2 percentage points for customers found to be letting a property without permission.
It might be tempting to let a property without telling the lender, but it is a high-risk move. It would breach the terms and conditions of the contract and in the worst case lenders could demand full and final repayment, which would force many borrowers to default on the loan.
Andrew Montlake of mortgage broker Coreco said letting a property without permission also invalidates home insurance policies, which could prove disastrous if something happened to the property while it was being let.
He added: “Mortgage lenders are getting tough on this and I would encourage borrowers to be honest and upfront with their lender.”
Aaron Strutt of Trinity Financial, another broker, said: “If the lenders want more of their customers to tell them that they are letting their properties out, many of them should not be so quick to raise their rates. Many home owners don’t want to let out their property, but they do it to ensure the mortgage repayments are kept up to date. At the moment, honesty is costing some home owners a lot of money.”