Contrary to popular belief, not every landlord is in the property business by choice. People’s circumstances often change, resulting in the need to move house but not sell up.
Some people temporarily move abroad for work, while others let a property when they move in with a partner or when elderly parents move into long-term care.
A slow property market, combined with Brexit uncertainty, means many people are now more likely to hang on to homes while they wait for the house price dust to settle even if they need to rent elsewhere.
Here, The Mail on Sunday gives the legal, financial and practical low-down for these ‘accidental landlords’ on letting out their property.
Accidental landlords are not allowed to rent out their home and keep the residential mortgage
1. MORTGAGES AND TAX
Accidental landlords are not allowed to simply rent out their property and keep their residential mortgage. To let a property without falling foul of your mortgage lender you need either the lender’s ‘consent to let’ or a specialist buy-to-let mortgage.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: ‘Consent-to-let tends to be on a short-term basis. If your lender agrees then they may do nothing, charge a one-off fee or load the interest rate during this period.
‘Quite often the consent-to-let will be for a finite period – typically six or 12 months. If the property is to be let out on a long-term basis then landlords need a buy-to-let mortgage.’
Buy-to-let lenders typically require the rent to cover 125 per cent of the mortgage repayments; so if your mortgage is £1,000 a month, you would need a rental income of at least £1,250 a month. Most lenders demand a deposit, or equity, of at least 25 per cent of the property value.
There are also higher mortgage arrangement fees – often a percentage of the loan amount, rather than a fixed sum.
The way landlords are taxed began to change in April 2017. Under Section 24 of the Finance Act, there is a gradual tapering down in the tax relief that allows landlords to offset the cost of mortgage interest against their rental income.
Last April saw this tax relief reduce to 50 per cent. It will drop again – to 25 per cent – in April 2019, and then to zero per cent in April 2020 when it will be replaced by a tax credit worth 20 per cent of mortgage interest.
I’m on a career break so it’s nice to have regular rewards from property
Claire Loader became an accidental landlord after meeting her now husband Dave, 47, and moving into his house.
She let out her one-bedroom house in Taunton, Somerset, which she had bought two years earlier in 2009 when she was a mature student. She is now a stay-at-home parent to Emma, 4, and Jack, 2.
Moving on: Claire Loader let her house after moving in with her partner
Claire, 36, says: ‘I initially let my property to a friend but it was not well looked after and it was mouldy by the time she moved out. I moved back into the house in 2012 for six months and when I moved out again I decided to use a letting agent to find and manage tenants. There have been about five tenants since then – found by the letting agent.’
She adds: ‘I’m having a career break at the moment and it’s nice to have a regular income from the property.
‘The mortgage is interest-only and there is quite a bit of equity in the property – I bought it for £70,000 and it is now worth about £125,000 – so I am not too worried about paying off the capital.’
Given her past experience, Claire would warn other landlords against letting to friends as it can make it tricky to raise concerns.
She adds: ‘It is easier to use a third party to deal with any issues that come up. We pay the agent about £50 a month and they have always found a new tenant when one moves out. Make sure you have a good contract and that you protect the deposit. You also need to have the right insurance.’
2. FINDING A TENANT
Attracting the right tenant can mean the difference between a stress-free experience and a constant headache. The ideal tenant will pay the rent on time each month, abide by the terms of the tenancy agreement, and co-operate if the property needs repairs.
Landlords should thoroughly check out potential tenants before committing to a tenancy. This means carrying out a credit check, seeing payslips or bank statements to assess affordability, and getting references from previous landlords.
The Immigration Act 2014 puts the onus on landlords to check a tenant has the legal ‘right to rent’ in England. Landlords can be fined up to £3,000, or even be sent to prison for up to five years, if they let a property to illegal immigrants.
Landlords in England must ask to see a tenant’s original documents. This might be a residence permit, a UK immigration status document or an endorsed passport.
These rules do not apply in Wales, Scotland or Northern Ireland.
3. LETTING AGENTS
Many landlords hire a letting agent to either find a tenant or manage the whole tenancy. Using a third party means you will not be bothered by maintenance queries or late rent payments, but handing over the reins comes at a cost. Agents typically charge 10 to 15 per cent of the rent to fully manage a property, but many charge extra fees for signing or renewing contracts, obtaining references, making credit checks, and dealing with inventories.
Sam Mitchell, chief executive of online estate agent HouseSimple, says: ‘Many landlords use a letting agent to find tenants and are then happy to manage the property themselves to save on management fees which can be quite substantial. But the advantage of handing over the management of the property to an agent is that you will not have tenants calling you at all times of the day and night when something goes wrong.’
4. TENANCY CONTRACTS
Most private landlords let property on an assured shorthold tenancy agreement. Such agreements normally have a fixed term of six or 12 months then continue on a rolling monthly basis or are renewed for another fixed term.
Danielle Clements, property litigation specialist at Gorvins Solicitors, says: ‘An assured shorthold tenancy gives tenants certain stipulations they need to abide by and also certain rights to protect them, such as not being evicted without notice. The agreement means the tenant has a legal interest in the property and that the landlord has given up certain powers on their property. For example, not being able to turn up unannounced and demand to enter the property. This has to be agreed with the tenant.’
Landlords could be forced to offer tenants three-year tenancies if new Government proposals become law.
Plans under consultation mean landlords would be tied-in for three years but tenants would be able to leave before the end of the minimum term.
The aim is to give renters more security. Landlords are generally opposed to the plans, which will make mortgage lenders wary about approving loans.
Tenants: As a landlord, you need to do a credit check to assess they can afford the property
5. EVICTING A TENANT
Assuming you have an assured shorthold tenancy in place, landlords must follow procedures set out in the Housing Act 1988 to evict a tenant. You can issue a section 21 notice if you want the property back after a fixed term ends, or a section 8 notice if the tenant has broken the terms of the tenancy.
In either case, if the tenant does not leave when requested, you will need a possession order from a court to regain possession of the property.
Saida Bello, housing lawyer at national firm Setfords Solicitors, says: ‘There are strict procedural rules to follow when seeking to evict a tenant. The court takes a dim view of any action that could be considered as harassment and it is a criminal offence to evict a tenant without the right court order.’
6. DEPOSIT PROTECTION
Most landlords ask tenants for a deposit equal to four to six weeks’ rent to cover damage to the property or unpaid rent. The deposit must be protected in one of three Government-approved deposit protection schemes: the Deposit Protection Service, MyDeposits or the Tenancy Deposit Scheme. These schemes all run dispute resolution services which can step in if the landlord and tenant cannot agree on deductions from the deposit at the end of a tenancy.
Landlords who fail to protect a deposit risk having to pay their tenants compensation of up to three times the deposit amount, and will not be able to evict them using a section 21 notice.
7. VITAL PAPERWORK
Landlords are governed by more than 100 pieces of legislation, many of which relate to paperwork that must be in place at the beginning of a tenancy. Landlords need to give tenants the following documents:
- A copy of the government’s ‘How to rent’ guide.
- A copy of the deposit protection certificate.
- An energy performance certificate.
- A gas safety certificate.
Landlords must also arrange for a smoke alarm to be fitted on every storey of the property, and a carbon monoxide detector to be installed in any room where solid fuel is used.
In England, most landlords who let a house in multiple occupation – often known as an HMO – will need a licence from their local authority. About 70 councils in England also run additional or selective licensing schemes. Landlords can check with their local council as to whether they need a licence or check with the National Landlords Association. Wales, Scotland and Northern Ireland all have compulsory landlord registration schemes in place.
8. INSURANCE
Normal residential home insurance will not be valid once a property is let out. Owners need specialist landlord insurance to cover the building and any contents they own, such as furniture. There are various extras that can be added to the policy including liability cover if a tenant is injured in the property, legal cover to recoup unpaid rent, and loss of income in the event the property is left uninhabitable, such as following a flood or fire.
Richard Truman, head of operations at Simple Landlord Insurance, says: ‘Peace of mind does not have to cost the earth. When making the purchase look for quality cover, good reviews, and clarity on what is covered and what is not.
‘Do not dismiss the extras such as legal cover out of hand – tailor the policy to your property, and check prices before you auto-renew next time around.’
Master the legal minefield – or risk thousands of pounds in fines
Changes: MP Karen Buck’s bill will give tenants new rights
Landlords need to keep up with constantly changing rules and regulations.
For example, since April 1, newly let properties have needed a minimum energy performance rating of E and this will apply to all rental properties from April 2020. Landlords can be fined up to £4,000 if their property does not meet the required standards.
The Deregulation Act 2015 comes into force for all tenancies on October 1 (it has been in effect for new tenancies since October 2015). The act changes when and how eviction notices can be issued.
Meanwhile the Homes (Fitness for Human Habitation) Bill is working its way through Parliament.
Put forward by Labour MP Karen Buck, the bill will give tenants the right to sue landlords who let properties in a poor state of repair.
Another bill likely to become law within the next year is the Tenant Fees Bill. This will stop letting agents charging tenants fees for references, credit checks and for setting up a tenancy. It will also cap deposits at six weeks’ rent.
All of this will mean a huge shortfall for agents who are likely to start charging landlords higher fees.
Landlords should consider joining a professional body such as the National Landlords Association to keep up-to-date on legislation.
The association’s director Chris Norris says: ‘A quick search on any landlord or property forums will bring up horror stories from accidental landlords who did not prepare properly before letting out their property.
‘Membership is useful particularly if you are not sure about your legal responsibilities.
‘It will provide all the support required to deal with every aspect of renting your property.’