The simple answer to the question, ‘Is it illegal to rent a house without a buy to let mortgage?’, is ‘No’.
Considering that lots of landlords are cash buyers, there are no legal restrictions as to how a landlord funds their buy to let investment.
However, it’s important to appreciate that you cannot let a house out to tenants if you have a residential mortgage on it without the lender’s permission.
Essentially, if you already own a property outright or you are a cash buyer, then there’s no need to have a mortgage on a rental home.
And if you do require a buy to let mortgage, then you need to be honest with the mortgage provider and you’ll need to put a business case together because their lending criteria are much tighter than they are for residential mortgages.
Buy to let mortgages versus residential mortgages
There’s a big difference between buy to let mortgages and residential mortgages, with the latter requiring a lower deposit and are less expensive. They’re also easier to obtain.
Lenders will see a buy to let property as offering them a bigger risk because it’s not owner-occupied and the property will have tenants.
Consent to let
We have mentioned already that if you have a residential mortgage and as the homeowner you want to rent out your home for a time, then you need to follow the rules.
Whether you are moving overseas for work or even moving in with a new partner, you cannot simply move tenants in and have them pay rent.
That’s because the lender will need to give ‘consent to let’, or sometimes they refer to it as ‘permission to let’.
This means the lender will agree for you as the homeowner to let your property for an agreed period.
Each mortgage lender will have their own lending criteria, so each application will be assessed individually and agreed on its merits.
You may find that some lenders may levy an admin fee and some may increase the rate of interest for your residential mortgage – so it will be closer to the rate they charge for a buy to let mortgage.
Also, if the home is still being rented out at the end of the time period agreed for a residential mortgage, you may find that most lenders will insist that you convert your mortgage into a buy to let offering.
There’s a common term within the property investment world to describe those who find themselves renting out property, even though they have not set out to become a landlord.
They are known as ‘accidental landlords’ because they may have inherited a property or they want to move in with a partner without having to sell their current home.
It may be that it’s not a good time to sell the property and they want price to rise – but they still need to tell the mortgage lender that they are a landlord.
Don’t believe for one moment that this is not an important issue to tell the lender and don’t believe that they will not find out.
Most lenders have sophisticated methods of finding accidental landlords and they will investigate if they suspect that the property is being rented out.
So, the best advice is to contact your mortgage lender to tell them what you’re planning to do and requesting a consent to let.
If you do not follow this route, then you may see your lender demanding the instant repayment of your mortgage – and most homeowners will be unable to do this.
The reason lenders can do this is that you will be considered to be in breach of the mortgage terms and conditions. In addition, you’ll also face the risk of badly affecting your credit report so you may struggle to borrow or secure lending in future years.
Buy to let mortgages
We have mentioned already that most lenders will see a buy to let property as offering them a risky investment, more so than a residential property.
And since 2017, when the credit crunch occurred, the Bank of England has introduced tighter affordability rules for all landlords.
Buy to let mortgage interest rates tend to be higher, so the repayments are higher than they are for residential mortgages and this will affect a landlord’s profitability.
A lender will also consider those periods when the property is empty and no rent is being paid.
The bottom line is that the buy to let mortgage lender will need to be reassured that the property will generate enough in rental income to more than cover the mortgage repayments and deal with any void periods too.
There are also other considerations that a landlord who lets their property with a residential mortgage needs to consider and that’s their insurance cover.
Put simply, your landlord insurance will be invalid if you don’t have a buy to let mortgage for the property that has tenants living in it.
It’s not worth running the risk but there will be landlords wanting to save money by taking the chance of having a residential mortgage on rental property.
It’s also worth mentioning that if your residential mortgage has been completely paid off, then you are free to let the property out to whoever you like.
That’s because you own the property and not the mortgage lender so there are no mortgage rules and conditions for you to be breaking.
In addition, if you are paying for a house in cash and there’s no mortgage at all, then you’re also free to rent out your property.
However, it is worth highlighting that some lenders may restrict who you let the property to with a buy to let mortgage, for example, they may not allow you to rent to a family member. Some will but most will not.
If you do want to rent a property to a member of your family, then you should be looking for a ‘family buy to let mortgage’ from a lender.
You also need to charge the family member a fair rent as the tenant and this figure will be based on similar homes in your area.
Again, you will need to carry out all of the relevant checks on the tenant as well as the property as are required by law. There will be no avoiding of your legal responsibilities even though the tenant is related to you.
Living in a buy to let property
For those wanting to know whether they can have a buy to let mortgage and live in the rental home themselves, then the answer is ‘No’.
The reason is simple and that’s the fact the lender may face a sanction if they arrange for an unregulated mortgage for what will be an owner-occupied home.
And if you do live in your own buy to let property for any length of time, then you may find you are breaching the terms of the mortgage and the lender may ask you to repay the loan in full.
Again, most people will struggle to repay their mortgage on demand.
Changing a residential mortgage to a BTL mortgage
For those landlords who have a residential mortgage and are thinking about changing it to a buy to let mortgage, then this is a straightforward process.
While you need consent from your lender – and it is possible that they may refuse – you can remortgage with a new buy to let lender.
There may be early redemption penalties on your mortgage that may be incurred and you will need to check carefully before making the switch.
You also need to find the best buy to let mortgage product at the best rates for meeting your current and future needs.
Rent a house without a buy to let mortgage
Essentially, while it’s not illegal to rent a house without a buy to let mortgage, those that do have a mortgage, then you need to be very careful to ensure you comply with your lender’s terms and conditions or run the risk of paying a heavy financial price.