Lenders cover their backs over lettings: Homeowners turned landlords are expected to keep rules

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The Independent Online
ANNIE, a recruitment consultant from Surrey, faced a common problem. She received an offer of a job in London which involved long hours and time- consuming commuting.

Annie decided that she would have to move. As the housing market is so depressed, she decided to let her house rather than sell at a loss.

Prospective landlords saddled with mortgages usually require the lender's consent before the property can be let. The Cheltenham & Gloucester's standard conditions state: 'The borrower shall keep the property always in his possession and available for disposal with vacant possession (subject to any lease or tenancy authorised under the terms of these conditions).'

Most lenders provide that if the property is let without permission, the loan can be cancelled and the property sold so that its advance can be recovered.

Obtaining the lender's consent is usually straightforward, although many charge an administrative fee: the Nationwide, Halifax and Cheltenham & Gloucester building societies all charge pounds 50 to consider an application; and some lenders charge more.

Annie decided not to obtain her lender's consent because of the additional expense involved, although in theory this could put her mortgage at risk.

When considering applications, the lending institution will usually want to satisfy itself that the tenancy will not impair its ability to obtain possession of the property if the borrower defaults on the mortgage payments.

A lender usually requires the tenancy agreement to record its right to possession if the borrower defaults on payment. The agreement normally takes the form of an assured shorthold tenancy, giving the tenant a minimum of six months' security of tenure. However, at any time after the first three months of the agreement, the tenant can be evicted on three months' notice.

Income received from letting property is taxable. Where the property remains the landlord's main residence, Miras tax relief remains available against the interest payments on the first pounds 30,000 of the mortgage. The advantage of Miras relief is that it may be set against income from any source, not merely rental income.

It is possible for interest payments on the entire property loan (not just the first pounds 30,000) to be set against tax payable on rental income only. In order to qualify for this relief, the property must be let for at least 26 weeks a year. Any unused relief can be carried forward and used against future rental income. Expenses such as gas, electricity and maintenance and repair costs can also be set against tax.

Last year, a new tax relief was introduced for owner occupiers and tenants who let furnished accommodation in their own homes. Under it, the first pounds 3,250 of annual rent became exempt from tax. A tenant who rents a room in the landlord's own house will not normally attract any security of tenure.

However, as Mike Williams, a chartered surveyor with Williams Properties, explains: 'Ensuring that the property is rented out in the most tax-efficient manner is of little use if the tenants prove unable or unwilling to pay the rent.'

Williams Properties is involved in letting properties in the Northampton area. Most of its tenants are unmarried couples who do not yet want the commitment of buying a property. All tenants are offered an assured shorthold tenancy for the minimum six-month period. Mr Williams believes that this gives both parties flexibility.

All tenants should be asked to provide a reference. 'I was surprised how many tenants were unable to provide a banker's reference,' Mr Williams remarks. 'It is generally best to ask for an employer's reference to ensure that the tenant is working and can meet the payments.'

A landlord should take a deposit to cover the cost of damage to the property and to ensure against non-payment of rent or the tenant's decision to quit before the expiry of the notice period. An inventory of the property's contents should be agreed and signed by the tenant before the tenancy commences.

Most important of all, the tenant should not be given possession of the property until the deposit has been paid and the tenancy agreement signed.

Unregulated occupation may create legal headaches later when the landlord wants possession.

(Photographs omitted)

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