Published: 26/09/2018 By Jane RobathanIf you can buy your next home without selling your first, you're in a very fortunate position. You'll need a decent amount of equity to leave some money in your original home (at least 25% of its value) and take out a deposit for the next. The mortgage for your first home will need to be converted or switched and there are ongoing legalities to stay on top of.
Reasons for letting your home out might be:
You're finding it hard to sell
You're relocating for work and might move back
You'd like to keep your first home as a long-term investment
Will this work for you?
Get a rental valuation. It's essential to know what you are likely to achieve in rent from the outset. Let-to-buy and buy-to-let mortgages calculate the amount they will lend based on the rental valuation of the property, not your salary (although in rare cases your salary can be used as a top-up factor). There are some good online valuation tools to give you an instant idea or you can also call our lettings manager, Harris on 020 3206 3063.
Ask your current mortgage lender if they will allow you to move and rent your home out. Most mortgages have a clause that doesn't let you rent your property out. Some lenders will allow it for a year while others allow it for a limited time, say if you temporarily move away for work. A lot will depend on your situation and mortgage circumstances.
Switch lenders or convert your existing mortgage to a buy-to-let or let-to-buy mortgage. These types of mortgages have higher interest rates (it's the nature of non-residential mortgages) and will incur arrangement fees, a valuation survey fee and may have an early repayment fee included. Let-to-buy mortgages are more recent products that have evolved to suit people who find themselves becoming landlords with enough equity in the first property, to withdraw some to use as a deposit on the second.
Once you know that letting out your first home is financially viable, let's outline the basics.
Will I have to pay income tax?
Yes. Your tax is based on your rental income at a maximum rate of 20% relief regardless of which tax band you're in. For example, if you're a higher-rate tax payer (at 40-45%) you can't claim for tax relief for over 20% for your rental property.
Do I pay capital gains when I sell?
Yes, if you're selling a second home for more than you paid for it. Capital gains is a tax on your capital gain (or profit). You don't pay capital gains on your residential home.
You begin paying capital gains 18-months after you move out. If you sell the home before then, you don't pay this tax. If you rent out your home for say, five years, you pay capital gains for those five years minus the 18-month allowance, so you'd pay for a three-and-a-half-year period. The total is worked out by considering the time you weren't resident and the overall profit, via a pro-rata sum. Finally, capital gains is tapered so the longer you have lived in the property, the less tax you'll pay. You'd really benefit from an expert's advice, so talk to a tax advisor about this.
Do I need an estate agent?
The argument to use an agent is strong, but of course you can manage the tenancy yourself with some research, planning and a flexible diary. You need to be confident you're operating within the law and ready to drop everything if an appliance breaks down.
An agent will find your tenants, reference them on your behalf, collect the rent, keep on top of legal issues and coordinate your paperwork. They can arrange check-in (and out) inventories, cleaning between tenancies, your annual gas and electricity certificates, energy performance certificates and will advertise your home on the most popular portals. They will also arrange emergency repairs should a pipe burst on a Sunday evening.
Another benefit is that a good agent will be in the best position to avoid any voids in tenancy. If your tenants aren't staying on when their contract comes to an end, your agent can begin lining up the next tenants. Agents pay a lot each month to advertise on the best portals, employ professional photographers and have staff that call out a database, accompany viewings and negotiate offers.
Agents will usually be able to offer different service packages at different rates and fees can often be negotiated. Packages usually start at 10% and rise to 15% of the rental income a month. Choose a local agent with a good reputation, whether a large corporate or a small independent. You could find an independent agency will do more for you, service-wise, than a large company. Independents have less corporate bureaucracy to navigate so can personalise their offer to be more helpful.
Insurance for landlords
You will need to switch your buildings insurance cover to one geared for landlords. It will be more expensive than residential buildings insurance, but it is a legal requirement. If your property is being let out with furniture you'd like to protect, then you could get this insured too. There are even policies to cover your home should you let it out to tenants with pets, something we advise you to consider.
By far one of the most valuable insurances to consider is one that protects your rent payments and offers legal expenses should you need to evict a tenant. Read the small print as these policies often have an excess of a month's rent and differ dramatically in what they will or won't pay out.
Being a landlord means you're future-proofing your pension, savings pot or children's inheritance. Hang on to your first home if you can afford to.