BTL vs Residential - what are the rules?

crawf1982

Ok - here's the scenario: My friend and I want to get a joint mortgage and buy a house.

1. If we get a residential mortgage is it legal to then rent out any of the rooms? (I seem to recall seeing a "Rent a Room" scheme mentioned on the tax return forms somewhere)


2. If we get a BTL mortgage can we live in the house and rent the remaining rooms out? I did not think that was allowed but when you go into the BTL section on Charcol the first thing it says is:

"If 40% or more of the property to be mortgaged will be or is intended to be occupied as residential accommodation by you or a related person, then your mortgage will be regulated."

which suggests to me that we can do what I am suggesting.


Any help would be greatly appreciated.

Cheers,

Dave

nmiah786

Also remember that with BTL you will definately need 15% deposit whereas with residential mortgage you could get away with a minimum of 5% depending on both your income and circumstances.

I think it really depends on how many room house you are buying and also how many of those you will be renting out.

I dont see any reasons why you would want to buy a house via BTL mortgage and then ren some of the rooms out. I sure you can get a residential mortgage, live in it and also have lodgers!!!

payless

crawf1982 wrote:

"If 40% or more of the property to be mortgaged will be or is intended to be occupied as residential accommodation by you or a related person, then your mortgage will be regulated."

that bit just relates to how the different types of lending is regulated/ consumer protection applied

crawf1982

nmiah786 wrote:

Also remember that with BTL you will definately need 15% deposit whereas with residential mortgage you could get away with a minimum of 5% depending on both your income and circumstances.

I think it really depends on how many room house you are buying and also how many of those you will be renting out.

I dont see any reasons why you would want to buy a house via BTL mortgage and then ren some of the rooms out. I sure you can get a residential mortgage, live in it and also have lodgers!!!

The deposit is not a problem.

Having done some calculations on Charcol we would be able to buy a reasonable 4 bed house in our area if we got a residential mortgage. If we got a BTL we would be able to get a really nice 5/6 bed house if we had 3/4 tennants. Basically it looks like we would be able to borrow much more with the BTL - it roughly works out to be add a tennant, add a bedroom.

But is that arrangement actually allowable? If you get a BTL mortgage on a house can you live in the house with the tennants?

Also, in terms of having "lodgers" if you have a residential mortgage - I thought that was mortgage fraud? Is that technically correct?

Cheers,

Dave

MortgageMamma

Dave, some information I have copied and pasted from my companies website. Hope this helps, it covers most issues relating to BTL's there is also a section "letting your residential property".

Buy to let mortgages

Why buy to let?

In the UK, unlike many other European Countries, there is a very strong tendency towards property ownership. It is seen by society as a natural step in financial progression, and a sign of status and financial good standing. Buying a home is widely considered a natural step for couples and singles alike.

In recent years, due to limited investment performance in various UK sectors and rising house prices, it has become popular to buy property as a form of investment.

Whilst buying and renting our property is a good way of providing regular income, combined with the potential to develop a healthy level of equity over time on the property, it is important to consider the amount of responsibilities, costs and legal requirements involved.

This section of the website is designed to inform you of these and recommend select products to maximise your rental income and minimise the inconveniences so often associated with tenanted properties.

Choosing a suitable property
The most desirable of factor in buying a property to let is that there is a continuous tenancy. If there are no tenants, then you, the landlord, will have to pay the mortgage and buildings insurance. It is important to consider that you are able to afford this before taking a buy to let mortgage.
Location is an important factor in determining whether your property will be considered desirable by potential tenants.
The safest area to buy in is an area that you are familiar with. You have established knowledge of various considerations such as public transport, local facilities such as hospitals and employment prospects. Buying in your local area also allows you to keep a close watch on your investment property without inconveniencing the tenant. Whilst in some areas it is desirable to live as remotely as possible, most tenants would look for facilities such as Parking - Most people drive, make sure there is space to park. Security does the property have an alarm? Is it is a good well lit area? Leisure where is the property in relation to pubs, restaurants and sports facilities? Transport links Are major roads accessible? Schools & Education If you wish to rent to families then proximity of schools may be a primary concern.
All these points can make or break your property, and indeed a property offering all these facilities will be more marketable.
It is often thought that the advice of a local letting agent is invaluable, even if you choose not to use their services. They will provide information on the amount of rent you will be able to get for your property and can take the strain of repairs and maintenance, however all this comes at a cost and it is wise to investigate various letting companies before committing to one. It is also possible to market your property in the local newspaper, through websites such as http://www.fish4homes.co.uk and various other means.
It is vitally important to have your property let consistently, you are about to enter a financial marketplace, and your property will be in competition with other properties for your tenants. It is important to make your property as attractive to tenants as possible.

Legal Issues facing a Landlord
This web page is a guide only and is not intended as Professional Advice. Independent Mortgages Online Ltd recommends that you seek Independent Legal Advice on the following matters and cannot be held accountable for issues arising as a result of any of the information that follows.
Tenancy Agreements
Prior to 1989 most residential tenancies were based on the 'rent acts' which gave tenants substantial rights. This type of tenancy was known as a protected or statutory tenancy and some still exist.
Since 1989, landlords have been able to implement an Assured Shorthold Tenancy. Many mortgage lenders will only accept this type of tenancy, as it enables them to take possession of the property quickly should the lender default on the mortgage.
A shorthold tenancy provides the tenant with security of tenure for the contract period (normally 6 months), but none thereafter. It is however possible for the tenant to request another tenancy after this period expires.
If you are purchasing a property with sitting tenants, it is important to establish the type of tenancy and the rights it gives the tenants. It can sometimes be difficult to get a mortgage with sitting tenants and professional advice should be sought.
If you are letting a property for the first time, it is advisable that you create an Assured Shorthold Tenancy Agreement. Take advice over the terms of the tenancy, from a local letting agent or solicitor that specialises in property. You could also contact and become a member of the National Landlords Association http://www.landlords.org.uk or the Residential Landlords Association [url]Http://www.rla.org.uk[/url]
Letting of your residential property
If you wish to let your own mortgaged home, you will need to obtain the consent of your mortgage lender to let. If you let the property without consent you will be in breach of contract (look in your mortgage deed for a clause prohibiting letting without consent of mortgage lender) and the lender could take action against you.
If your mortgage lender is unwilling to consent to your application then you could remortgage to an alternative lender on a buy to let basis. You must ensure the viability of this by looking at the charges for redeeming your current mortgage (if any) and the charges to enter a buy to let remortgage contract. One of our qualified Independent Mortgage Advisors will be able to assist you with this.
Insurance
It is also necessary to obtain the consent of your building insurers to let the property. If this is not available then you should switch to another insurer. There are many building and content insurances specifically designed for landlords, and Independent Mortgages Online Ltd are in a position to advise and recommend on a selection of Buildings Insurance, and Rent and Legal Guard insurances which will cover your legal costs and replace your rental income in the event your tenant defaults and you have to instigate eviction procedures. Please contact one of our advisors for further details, as the aforementioned products are specifically designed for let properties and require specialist advice.
Safety
Gas appliances should be inspected every 12 months by a CORGI registered technician. A record of the gas check should be kept indefinitely for your insurance purposes. If the gas safety checks are not carried out, you will be liable for damages should any harm come to your tenants as a result of your failure to maintain gas appliances. There are a number of insurance products on the market currently, which offer this service together with Home Emergency Cover. For further details of these policy providers you can contact the Association of British Insurers http://www.abi.org.uk
Electrical fittings and appliances should also be checked on a regular basis.
There are no specific fire regulations unless the property is classed as a house in multiple occupation (HMO), but again it is advisable to at least fit the property with a smoke detector alarm on each floor level.
Houses in multiple occupation (HMO)
Where a property is let to several unrelated people, for example bedsits, the local authority may class this accommodation as multiple occupation. This is likely to be the case where there are over 4 unrelated occupants.
In this situation, it may be necessary to register the property with the local authority. You may also need planning permission to change the use from single residential occupation to multiple let occupation. The planning department may also wish to inspect your property for fire escape routes and health and safety purposes.
The property insurers should be told if the property is in multiple occupation, as it is likely your premiums will change or a new policy altogether is needed.
The landlord is responsible for the payment of council tax.
There will be higher degree of management required owing to the greater number of tenants, and again home emergency cover, fire safety precautions, and good standards of property maintenance are advisable.
Further information can be obtained about this from the National Landlords Association.

This web page is a guide only and is not intended as Professional Advice. Independent Mortgages Online Ltd recommends that you seek Independent Legal Advice on the above issues and cannot be held accountable for issues arising as a result of any of the information above.

Buy to let taxation
The current rules regarding taxation are complex and liable to change. It is advisable that you seek professional advice on this aspect from the Inland Revenue or with a professional accountant to verify the position with regards your own tax situation. The information below is a brief description of the current taxation situation with regard to buy to let property, it does not constitute advice and Independent Mortgages Online Ltd takes cannot be held responsible for any action taken as a result of the content.
We are each responsible for declaring and paying the taxes that are due.
When you buy your first let property, you should inform the Inland Revenue immediately. If you do not declare your buy to let property and it is later discovered, the Inland Revenue could bring legal proceedings against you.
You should submit a tax return for the tax year in which the rental payments are due. You will need to complete schedule A; this schedule covers rental income from UK land and buildings.
Single or Joint Ownership
If you put a property into joint ownership then the tax liability is shared. There are increased tax benefits if one of the partners is a non taxpayer.
Income tax
You will have to pay income tax on the net profits you make from the rental income at your highest rate of income tax. If you are currently a higher rate income tax payer then the profits you make from letting will be taxed at the higher rate.
If the property is in joint ownership then the tax liability is shared.
The regular rental income you receive is your gross income. You can deduct from this figure, various expenses to arrive at a figure for net profit. The largest of these expenses is likely to be the interest payments on your mortgage.
In determining whether an expense is allowable, the Inland Revenue say it should be wholly and exclusively used for the purposes of the rental business. For example, repairs, redecoration, cleaning, gardening and insurance can be used.
You should keep consistent records of income and expenditure. You will need these in order to prepare accounts for the Inland Revenue.


Capital Gains Tax
When you come to sell your investment property the profit (or gain) you make may be subject to capital gains tax.
Please note that capital gains tax is not payable on any profit you make from the sale of your own residential property. If a property has been used both as home and as a let property then profits are split according to the time spent in either use. There are however exemptions that may apply and it is important to take professional advice either from the Inland Revenue or a qualified accountant in respect of this.
The information above is a brief description of the current taxation situation with regard to buy to let property, it does not constitute advice and Independent Mortgages Online Ltd takes no responsibility for any action taken as a result of the content.

crawf1982

Magic! Thank you.