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Last Updated: Friday, 17 December 2004, 06:22 GMT
Ask the Expert: Rental mortgages
David Hollingworth
This week's expert is David Hollingworth

BBC News website's Ask the Expert column gives readers a chance to get their financial questions answered by experts.

This week, David Hollingworth of mortgage brokers London & Country helps homeowner Barry Shortt, who has a buy-to-let query.

Mr Shortt is thinking of renting out his apartment from next August. His two-year fixed rate mortgage will expire around that time. Is he obliged to switched to a buy-to-let mortgage?

David Hollingworth writes:

A standard mortgage for your own home will be offered on the basis that the property is your main residence, not for business purposes or for letting out.

When you are ready to let the property out you should therefore inform your existing lender and gain their consent.

DO YOU HAVE A QUESTION?

Often a lender will allow the property to be let, charge you an administration charge and leave the mortgage on the same interest rate, but they are fully entitled to increase the rate you will pay.

They will insist that the tenancy is formalised with an "assured shorthold tenancy". This is a tenancy agreement setting out the rights of the tenant and landlord and is usually for a six-month period.

If you do not inform the lender and do not seek their consent to let the property, then you will be in breach of the terms of your mortgage. This rule applies to all residential mortgages.

In theory, the lender could refuse to let it out and require you to pay the money back. Then, you would be forced to go elsewhere and remortgage to a buy-to-let deal.

More realistically, though, the lender will want to hang onto your business - and there shouldn't be a problem as long as you tell them.

Higher rates

Mortgage rates for owner-occupiers are cheaper than buy-to-let deals, typically by between a half to a full percentage point.

Buy-to-let mortgages are more expensive because they are a greater risk for the lender: the chances of someone stopping payments of the mortgage on the roof over their own head is smaller than on a property that they are letting out or struggling to find tenants for.

It is therefore worth shopping around.

The level of borrowing available on a buy-to-let mortgage is calculated in a different way to a normal mortgage. It will be based on the expected rental income rather than the borrower's salary.

Lenders are looking for a comfortable margin of rental income above the mortgage interest payments.

Extra costs

Buy-to-let products are also only available up to a maximum of 85% of the property value (although Northern Rock has just announced it can go to 87%).

Be sure to factor in switching costs, such as legal and valuation fees, when looking at a buy-to-let deal.

Many lenders now offer help with these costs on certain products so you need to work out if a deal offering lower costs but a slightly higher rate will work out cheaper or vice versa.

If you think you might return to your home after a year or so then you should opt for a deal that will not lock you in so that you can switch to the best rates if you move back.

It is also important to ensure you tell your insurance company otherwise your buildings and contents insurance may not cover you against any eventuality.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.


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