Can First-Time Buyers Rent Out Their Property?

First-time buyers often have many concerns when navigating the housing market. One common concern is whether or not they can rent out their property. In short, while this is possible, it is subject to numerous legal, financial and practical considerations. This article explores some of the key factors that first-time buyers need to consider before deciding to rent out the property they have purchased.

Mortgage Terms and Conditions

When buying a property as a first-time buyer, most buyers take out a residential owner occupier mortgage. Such mortgages are designed for a property that will be a borrower’s residence. As a result, such mortgages typically come with a clause that prohibits the borrower from renting out the property without the prior consent of the lender.

If you are thinking about renting out your property as a first-time buyer, the first step is to review your mortgage terms and conditions. In most cases, you will almost need to obtain a "consent to let" from your lender. Such consent, if granted, usually allows you to rent out the property only for a limited period, often no more than 12 months. It is, thus, only a temporary solution. If you plan to rent the property out for a longer term, you will probably need to switch your mortgage to a buy-to-let (BTL) mortgage.

A BTL mortgage is specifically designed for properties that are meant to be rented out. Unlike owner occupier residential mortgages, BTL mortgages often require a larger deposit - typically 25% or more of the purchase price - and come with higher interest rates. Lenders will also assess rental income. They generally require rental income to be at least 125% - 145% of the monthly mortgage payments. They will also take into account the landlord’s personal income and credit history. It is also worth bearing in mind that the terms of BTL mortgages typically prohibit the landlord or their family from occupying the property.

Stamp Duty Land Tax

Stamp Duty Land Tax (SDLT) is another factor to consider. First-time buyers usually enjoy SDLT relief where the purchase price does not exceed £625,000 and the property will be the buyer’s primary residence. In such situations, the first £425,000 of the purchase price is exempt from SDLT and the next £200,000 is taxed at a rate of 5%.  

However, if you decide to rent out the property following the purchase, you may become liable for payment of SDLT at standard rates. Under these rates, only the first £250,000 of the purchase price is exempt from SDLT and the next £675,000 is taxed at 5% and there are further bands with higher rates. If the property is treated as a second home, you may also become liable for a 3% surcharge over and above the standard SDLT rates.

Understanding SDLT implications is important as these can impact both your initial purchase costs and longer term financial plans. It is advisable to consult a financial advisor or tax specialist to ensure that you understand these implications before making any final decision about renting out your property.

Income Tax and Capital Gains Tax

Renting out a property also has other tax implications the first-time buyer might need to consider.  

When you rent out your property, any rental income that you receive from it, together with the associated expenses, must be declared to HM Revenue and Customs for tax purposes. This is in addition to your personal income from any other sources, such as employment, savings and investments.  

It is important to note that the tax treatment of rental income has changed in recent years. Previously, landlords could deduct all of the mortgage interest associated with a rented property from rental income for tax purposes. However, this relief has been phased out and replaced with only a 20% tax credit allowed on the mortgage interest payment at the 20% basic rate of income tax. This change has reduced the profitability of renting out properties for many landlords and it is an important factor to consider.

In addition to income tax, landlords might also need to pay capital gains tax (CGT) when they sell their property. You might be liable for CGT on any increase in the property’s value, after taking into account any allowable deductions, such as SDLT and buying and selling transaction costs. The CGT rate for residential property is 18% for basic-rate taxpayers and 28% for higher-rate taxpayers. Again, it is advisable to seek professional advice to understand how CGT could impact your financial position.

Legal Responsibilities as a Landlord

Becoming a landlord also comes with certain legal responsibilities. You are required to provide a safe and habitable property for your tenants. This includes ensuring that the property meets all relevant safety regulations, such as those relating to gas, electrical and fire safety. You will need to arrange for regular checks and obtain the necessary certification from appropriately qualified providers, such as an annual Gas Safety Certificate, to ensure that the property is compliant. In addition to safety, landlords must also ensure that their property has a valid energy performance rating certificate and meets the minimum required energy rating.  

Furthermore, landlords must protect their tenants’ deposits by registering them with a government-approved tenancy deposit protection scheme. This is a legal requirement and helps ensure that tenants’ deposits are safeguarded throughout their tenancy.

Another key responsibility is maintaining the rented out property in good condition. This includes carrying out repairs and addressing any issues that may arise during the tenancy promptly. Failure to do so can result in legal action, as well as damaging your reputation.

Insurance

If you decide to rent out your property, standard home insurance will no longer suffice. You will need to take out specialized landlord insurance, in addition to the buildings insurance. Landlord insurance is designed to cover the unique risks associated with renting out a property.

It is important to review the terms of any buildings insurance and landlord insurance policy carefully to ensure that it meets your needs. Some policies may also offer optional extras, such as legal expense cover, which can provide additional peace of mind.

Renting Out Rooms

If you are not ready to rent out your entire property, you might consider renting out a room instead. The government’s Rent a Room Scheme allows homeowners to earn up to £7,500 per year tax-free by renting out a furnished room in their home. This can be an excellent way to generate additional income without fully converting your property into a rental while you continue to live in your property as your primary residence.

This option can be particularly appealing to first-time buyers, who may need extra income to cover mortgage payments, but are not yet ready to move out of their home. It also allows them to maintain greater control over their property and avoid some of the complexities associated with becoming full-time landlords.

Conclusion

Renting out a property as a first-time buyer is possible, but it requires careful consideration of various factors, including mortgage terms and conditions, tax implications and legal responsibilities. Before making any final decision about renting out your property as a first-time buyer, it is advisable to seek professional advice.

FAQs

Q. Can first-time buyers rent out their property?

A. Yes, first-time buyers can rent out their property, but they must obtain a "consent to let" from their mortgage lender or switch to a buy-to-let mortgage.

Q.  What happens if I rent out my property without informing my mortgage lender?

A. Renting out your property without your lender’s consent will probably breach your mortgage terms, leading your lender to demand immediate repayment of your mortgage and any applicable penalty payments. If you are unable to meet the lender’s demands, you could face legal proceedings and ultimately repossession of your property.

Q.  What are the legal responsibilities of first-time buyers who want to rent out their property?

A. As a landlord, you must comply with safety and energy performance regulations, protect tenants' deposits, and maintain the property in good condition.

Q. Do I need landlord insurance if I rent out my property?

A. Specialist landlord insurance is required, as standard home insurance will not cover rental properties.

Q.  How does renting out my property as a first-time buyer affect my tax position?

A. If you rent out your property, you may lose your stamp duty reliefs as a first-time buyer and become subject to standard stamp duty rates or even surcharges on top of these, thus increasing your costs. In addition, rental income will be subject to income tax. You may also face capital gains tax when you sell the property.

Q. What is the Rent a Room Scheme and how does it work?

A. The Rent a Room Scheme allows homeowners to earn up to £7,500 per year tax-free by renting out a furnished room in the home in which they live.