When it comes to selling your house, there are lots of important decisions that need to be made. One of the most critical choices you will have to make is whether or not you are even going to sell your house at all or whether you will be renting out your house instead. Many people depend upon the sale of their current property in order to be able to purchase their next home, however renting out your property can be a decision that makes both practical and financial sense.
In this blog post we will be looking at how you can decide whether or not you should rent out your home, how you can rent your home, what an accidental landlord is and the pros and cons of renting and selling.
Looking for a quick answer? Check out our interactive menu below!
- Do you tell your mortgage company if you are renting out your house?
- How do I decide to rent my house?
- How much can I rent my house for?
- How much can you make from renting out your property?
- What mortgage and rental costs should I be aware of?
- What is landlord insurance?
- If I rent my home, will I have to pay income tax?
- If I sell my home, will I have to pay Capital Gains Tax?
- Pros and cons of becoming a landlord
- How much will it cost to rent or buy your new property?
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Do you tell your mortgage company if you are renting out your house?
When it comes to renting out your property to a tenant, you will need to check your mortgage in order to find out whether or not you will be able to rent out your home. Unfortunately, the majority of mortgages include clauses that forbid renting your property. Some mortgage lenders will allow you to rent the properties out for a year and others will allow you to rent it out if you are temporarily moving for work and your intent to move back to your original property.
However, if your mortgage lender does not allow you to rent out your property, you will have to change mortgages. This will usually be to a higher interest buy-to-let mortgage. This will also usually bring with it early repayment fees, valuation fees, and new mortgage arrangement fees.
If this does not appeal to you, you can also look into Let-to-Buy mortgages. With a Let-to-Buy mortgage, you let your current property out to tenants and use the Let-to Buy mortgage to buy your new property. You remortgage your property if you have enough equity to release and put the cash down as a deposit on your new home. You can then let out your current home and use the rental income to cover the mortgage on your existing home.
How do I decide to rent my house?
Deciding whether or not to rent out a property is a difficult decision and one that you need to weigh up properly. You may find yourself in a situation where it makes more financial sense to rent out your property rather than just selling it on the open market. Below are some of the situations where you may be better off letting a property rather than selling:
- You are confident that property prices are on the rise and that you will be able to generate a profit through rental properties
- You are able to afford to buy a new property without having to sell your original home
- You are moving for work or for another temporary reason and wish to keep your original property
- Your property is an attractive rental property that you will be able to generate a rental income through
How do you finance two properties?
One of the main deciding factors of whether you can sell your home or rent it out is your financial situation. If you are struggling financially then renting out your home may not be the best option for you.
If you are fortunate enough to have major equity in your existing property and have a sufficient income to finance the mortgage payments on your new property, then you are more likely to be successful in renting out your old home.
Should you need to raise the deposit for the new property, then a way you can solve this is by increasing the mortgage on your existing budget. Your normal work income should cover these payments. The next step you will need to take is to take a second residential mortgage out on your new property and your payments will be covered by your normal work income.
What this means is that you will now have two mortgages that you will be covered by your rental income and your normal income.
What is an accidental landlord?
You may find yourself in the position of becoming an ‘accidental landlord’. This means that rather than setting out to become a landlord and purchasing properties with the intention to rent and approaching various letting agents, you are instead struggling to sell your home on the open market and are instead having to rent out your home.
How much can I rent my house for?
When it comes to deciding how much you can charge potential tenants for rent, you will need to study the local market and see how much similar properties are being rented for in the area. You need to be realistic about how much you will charge for rent, as your property may not be worth as much as you would like.
You will need to carefully consider your target demographic and consider who your property would be suitable for. You will also need to decide whether your property will be furnished or unfurnished, an unfurnished house will be appealing to most tenants, however, students and young couples are unlikely to have enough furniture to fill the house so will find furnished more appealing.
How much can you make from renting out your property?
Before you decide to start renting your home out, it is a good idea to work out your monthly rental yield to ensure that you will not be paying more on a monthly basis for the house than you will be getting back.
As the property that you are working out the rental yield is for is already owned by you, the method of calculation is slightly different than if you were looking to buy it. Rental yield is the percent of the overall value of the property that you get back every year.
Rental Yield = (Monthly rental income x 12) / property value
The difference here however is that you wouldn’t be looking at dividing it by the property value, instead you’d want to divide it by what you still owe on the property.
What mortgage and rental costs should I be aware of?
If you are thinking of renting out your home, there are a few costs that you will need to familiarise yourself with. Not only will you need to consider the monthly mortgage payments you will need to make, but also the costs of maintaining a rental property.
It is worth bearing in mind that your mortgage lender will advise you that your rental income will be enough to cover your mortgage interest payments however there are several overlooked costs that could affect you later down the line. Below are some that you should consider:
- If you are unable to rent out your property, will you be able to cover the mortgage? Failure to do so could result in forced sale or repossession if you have difficulty finding a tenant.
- Will you maintain/manage the property or are you going to hire someone else to do this?
- Will you rent through a letting agent? If so, how much commission will they make from this?
- Will you be able to pay for the maintenance of the building?
- How many months of the year do you think you will be able to rent out your property for?
What is landlord insurance?
Landlord insurance is a crucial insurance that if you wish to let your property you will need to take out in order to properly protect yourself when letting out your property. There are different specialist policies available to landlords that protect against potential losses. If you do decide that you wish to let out your current property, then you will need to inform your current buildings and contents insurer to avoid invalidating your policy.
Most landlord insurance policies will include:
- Buildings insurance – in case of damage to the property structure or features
- Contents insurance – this will cover any contents that you have provided
- Loss of rent insurance – this will protect you if you are unable to rent out your property through health and safety through no fault of your own, such as a fire or flood
- Liability costs – this will cover your legal costs in the case you are taken to court
- Tenant default/rent guarantee covers any rent you may lose if a tenant does not pay
What is a Right to Rent check?
If you live in England and have decided to become a landlord, you are expected to carry out Right to Rent checks in line with the Immigration Act. If you fail to check whether tenants have the right to lawfully live in the UK, then you could face a fine or even jail time.
If I rent my home, will I have to pay income tax?
As of April 2017, landlords will have to pay tax on their entire rental income and not just the profit. You will only be able to claim tax relief on mortgage interest at a rate of 20%, regardless of the income tax bracket you are in. This means that if you are a landlord in a higher tax band you will pay tax on your rental income at 40% or 45% but you will only be able to claim 20% tax relief.
If I sell my home, will I have to pay Capital Gains Tax?
Capital Gains Tax (CGT) is a tax that is paid on any ‘gain’ or ‘profit’ on an asset that has increased in value since you originally purchased it. If you are selling your main home (primary residence) then you will not have to pay any CGT on it. However, if you are selling a second home then you may have to pay it. As the Capital Gains Tax regime is often subject to change and calculating how much you owe can be complicated so it is always worth seeking independent advice from either a tax advisor or from HMRC.
When do I pay Capital Gains Tax?
Whilst you will have to pay CGT on a property if it is your second residence, you will not have to pay it if you are selling it for less than you bought it for. Similarly, if you have previously lived in the property that you are selling, you won’t have to pay any CGT if you sell within 18 months of moving out.
When it comes to paying CGT, you will only have to pay it on the time that you have lived in the property, minus the 18 months. This is worked out as a proportion of the total gain in the value of the property while you have owned it.
The rate of Capital Gains Tax you pay is tapered, so the longer you own the asset, the lower rate you will pay. There are annual allowances so this means that the total tax bill may be less than you first expect.
Pros and cons of becoming a landlord
As with any decision there are pros and cons that you will need to consider, so we have created a table of the pros and cons to renting out your old property.
|It is an investment
|You will be taxed on any extra income you make
|You can receive extra tax deductions
|Being a landlord can be expensive
|Its an additional source of income
|You can run the risk of legal disputes if any faults are found with the property
|It can provide you with long-term security
|Tenants can be difficult and time-consuming
|Good alternative to selling if you are only moving temporarily
|Your money will be tied to the property
How much will it cost to rent or buy your new property?
Whether or not you will be able to afford to keep your old home alongside your new home will be dependent on the rental income you get as well as the cost of living in your new property.
You will need to work out how much your new rent and mortgage will be as well as the cost of buying and moving, conveyancing fees, survey costs and potential stamp duty charges.
How much it will cost depends on personal circumstances but deciding whether to rent or sell is not a decision that should be taken lightly. You should carefully weigh up all your options and plan out costs before committing to an idea.
This covers everything you need to know about renting out your house, if you have any further questions, queries, or insight into the subject, please feel free to get in touch!