Money: Borrowers beware the pitfalls of renting out: Caroline Merrell looks at the different policies on letting

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Over the past few years borrowers who have been forced to relocate because of a switch in jobs will have been faced with the impossible task of trying to sell their property.

Many borrowers will have resorted to renting their property to cover part or all of their mortgage until a recovery in property prices arrives. For many people, the only alternative to renting would be to cut the sale price, possibly to a level below their outstanding loan, or to go into arrears and risk repossession.

The ease with which it is possible to rent out property varies from lender to lender. One well-intentioned Northern Rock borrower came up against a huge stumbling block.

Maurice Doyle, a senior product manager with Bacardi Rum, bought a two- bedroomed flat in Newcastle upon Tyne five years ago for pounds 40,500. His mortgage was pounds 38,000.

In March 1992, he moved to Southampton because he changed his job. For the next 15 months he tried unsuccessfully to sell his flat.

By June 1993, he was getting desperate and applied to the building society to be allowed to rent out his property. A month later he had had no reply so he decided to go ahead and let the property through a local letting agency.

Four months later Mr Doyle decided to contact the building society again to confirm that it approved of the situation. He was also keen to confirm that his insurance would be valid.

The society then wrote back to him, claiming that it had written to him in July, refusing him permission to rent his property out, because the outstanding loan was greater than 75 per cent of the property's valuation.

Mr Doyle said: 'I wrote back to them saying that I had had two choices - either not let it out and default on my mortgage or let it out for a short period of time until the housing market picked up.'

Earlier this month the building society wrote back suggesting that Mr Doyle take out an pounds 8,700 loan from another lender to reduce his mortgage to a level below 75 per cent of the property valuation.

Mr Doyle is now beginning to regret disclosing to the building society that he had intended to let the property.

Dave Henderson, advertising manager at the Northern Rock Building Society, said that its mortgage indemnity insurer simply would not accept the risk of renting out a property where the loan was such a large proportion of the property's value.

Other lenders contacted, including Halifax, Bradford & Bingley, Nationwide and Woolwich did not make the loan/value ratio a prerequisite for any possible renting agreement.

Woolwich, for instance, would allow people to rent out under these circumstances providing the rental agreement was only short term. Nationwide said that it would allow a six-month rental agreement, subject to an administration fee.

Bradford & Bingley would allow a borrower to let, but only if the deal was supervised by its solicitor. The lender would charge an extra 1 percentage point interest.

(Photograph omitted)

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