‘Accidental’ Landlords

Laura Brady takes a look at this emerging breed of landlords who become so by default...

These days, whichever way you look at it, there is no getting away from buy-to-let. According to figures from the Council of Mortgage Lenders (CML), at the end of 2005 there were 701,900 outstanding buy-to-let mortgages in the UK. This compares to just 28,700 in 1998 when the concept of 'buy-to-let' was in its infancy.

The dramatic rise in figures is not hard to explain. Firstly, house prices during that period rose by a staggering 150 per cent, according to data from Nationwide Building Society and of course, new-found equity provides new-found opportunity. In addition, while the consistently low interest rate environment has been kind to borrowers, it does little for cash savings. Pensions and – until recently, stocks and shares – also hold little hope for a prosperous, or even comfortable, retirement.

In addition, criterion for buy-to-let mortgages has become more relaxed over the years, as it creeps further into mainstream lending. The average Rent to Interest ratio (how much rent you will need in proportion to the interest part of your mortgage repayment) is now 125 per cent, opposed to the 130 per cent in 1998, according to the CML. Lower deposits are also now accepted with today's landlords putting down an average of 15 per cent opposed to 25 per cent eight years ago.

Changing times

But the rise in buy-to-let's popularity can be attributed to social factors as much as to economic ones. While the vast majority of landlords have a very deliberate, medium to long-term strategy when entering the property investment market, there is a growing number of landlords who become so by default.

It’s clear from Office of National Statistics (ONS) figures that people are settling down later in life – the average age for a man to marry is now 30.6 and for a woman, 28.4. Having already got on the housing ladder alone or even with a friend or family member, it's therefore not unusual for people to find their name on the Title Deeds of two properties, not one.

“In this increasingly common situation, it's understandable that people try to hang on to their original property and let it out,” says Jill Fedeski, head of group marketing at buy-to-let lender, Paragon. “Not only do they retain their independence and flexibility, the returns would not be half as good if they were to sell up and put the money in the building society.” However, there is a whole host of considerations – many of them costly – that 'accidental landlords' need to take into account before jumping onto the buy-to-let band wagon.

Your existing mortgage

The first thing you will need to do is inform your mortgage lender that you no longer live in the property. “If you don't, you are theoretically in breach of your current mortgage agreement as it was underwritten on a residential basis,” says Fedeski. Depending on the terms of the mortgage, it may be that your lender will add a premium to your interest rate – perhaps in the region of one per cent – or transfer the product to a more suitable one. “But bear in mind that with product transfers, lenders can be quite reluctant to waive any early redemption charges since the Treating Customers Fairly initiative from FSA regulation," says Matthew Grayson, spokesperson for lender, BM Solutions.

It may be, however, that the lender refuses to offer a buy-to-let mortgage altogether, in which case your only option will be a total remortgage. But finding a buy-to-let deal on your own and with no experience of the market can be an arduous task for a first-time landlord, says Lee Grandin, managing director of buy-to-let broker, Landlord Mortgages. “It's a very good idea to use a broker that has specialist expertise in buy-to-let. It can save you a lot of work and in this market the best deals are often only available through intermediaries anyway.”

Your existing insurance

Bear in mind also that your current residential home insurance is unlikely to be robust enough to cover what is now an investment property. “It might be that you can keep your existing policy as it is, but it could also change slightly or incur a slightly higher premium depending on the circumstances,” says Carol Wright at Halifax General Insurance. “Either way, it is imperative that you inform your insurer of the change.”

If your current insurer cannot cover you on a buy-to-let basis, there are specialist companies that deal specifically in insurance for landlords. They will also offer additional policies such as to cover a tenant having an accident on the property premises or for non-payment of rent.

Taxing issues

It should come as no surprise that the taxman will also be asking for a slice of any profits your recently-turned investment property generates.

But although paying tax is a fact of life, the amount you pay can be reduced if you understand and take advantage of the tax breaks available to you.

“For example, while tax is charged on all rental income from your property/properties, you can claim tax relief on mortgage interest, repairs, insurance and letting agency fees,” explains Grandin. “You can also claim relief on 10 per cent of all rental income each year to cover depreciation and professional advisory costs incurred after the purchase of the property.”

Learning the legislations

Being a landlord these days is no child's play. Especially since the Housing Act 2004, property investors have been hit with a raft of different legislations such as HMO licensing (Houses of Multiple Occupation). “This is basically where you have five or more unrelated people sharing the same facilities in one house over three stories,” explains Grayson. “Now landlords of these properties need to apply for a licence from their Local Authority which can cost in the region of £1,000 to £1,500.” If a landlord fails to produce a licence they could face up to a £20,000 fine.

The Tenancy Deposit Scheme will also come into effect from April 2007. This will require that landlords surrender tenant deposits to an independent and government-approved private company. Alternatively they can retain the deposit in their own account and become a member of an insurance-based scheme to which they must pay a fee or regular premium. And again, failure to comply can result in serious consequences, including a fine of up to three times the deposit and even being denied access to your own property.

Do your homework!

It is therefore imperative that you your homework before launching into any form of buy-to-let. This means researching everything from how a boiler works to the definition of an HMO. “Even if you have just one property, it still constitutes a business and that takes time research and planning,” says Fedeski.