Considering letting our house and renting a flat to save

[Renty]

We’ve just been hit with an enormous hike in our mortgage and it’s feeling uncomfortably tight. We can just about live month to month, but absolutely no chance of a take away/ holiday/ treats.

We’re thinking about letting our house and renting a much smaller place for a couple of years to help us get through.

Is this a good idea? I guess this is my AIBU - would I BU to do this? Or am I being too simplistic in thinking this would work?

Anyone done the same, or considering doing this?

I sympathise, ours has gone up too and alongside childcare costs it’s all rather eye watering.

But depending on where you live but it might not be much of a saving even if it’s downsizing, there are more renters than properties in a lot of places which is driving up rents (which have already gone up in some cases as landlord’s mortgage rates have also risen). It also means some prospective tenants are offering rent above asking or say 6 months upfront to get ahead. So depends on the market where you are really.

It’s not a terrible idea but have you worked the figures out? You will probably have to pay tax on the rent, plus fees to an estate agent unless you’re going to do it yourself. Also would you find somewhere decent to rent around you? Plus I think you might need to declare this to your mortgage company.

Have you considered renting a room out instead? I think you can get £7k a year tax free (obviously do check). Some people also do Monday- Friday rentals too.

I looked into doing this, but the agent's fees, insurance, gas and electricity testing etc. all added up and by the time all these were taken off the rent I would receive, it just wasn't worth it.

I rent a house out and its an absolute nightmare. One drama and expense after another. Are you aware that only a very small part of your mortgage is seen as an expense so you will be taxed as if you are making much more of a profit than you are. Its very small profit margins unless you are mortgage free. You need- an epc certificate, gas safety certificate, electrical certificate. Agency fees for finding you a tenant. Check out fees when they move out. You need to do a tax return.
Mine is an investment for my son but it has been much more stressful than my full time job. Work out the figures before you do it.

You will have to pay tax on the income you receive from letting the house. Worth bearing in mind.

I agree with @Heronwatcher on the renting a room

you only need a couple of months without a tenant, clumsy or demanding tenant demanding work done, your small flat lease to be ended sooner than you expect & be left with nowhere to live for the whole thing to end up being a costly mistake.

You would need to change to a buy to let mortgage I think? Which potentially means a hefty ERC. I think consent to let is only in certain circumstances but I’m no expert.

I was considering keeping my old flat to rent out but once you consider mortgage, estate agents fees, contingency for small repairs and tax liabilities there would be hardly anything left each month. If anything major went wrong or if the property was empty I would have to stump up the cash!

Yikes, thanks everyone! This was my worry, that it wouldn’t be as simple as it sounds. And I didn’t know we’d need to pay tax on the rent, although now I realise it’s pretty obvious. I can imagine the costs really adding up.

It’s so depressing. We definitely wouldn’t want to sell now as the market is so dead, but this house feels like such a bloody millstone. :(

Hi OP,
If you are a higher rate tax payer (or the rent you receive added to your wage makes you a higher rate tax payer) then you can’t deduct all of your mortgage interest as an expense. You get a 20% credit back towards it so e.g. if you are a 40% tax payer (or the rent makes you one) and you receive 10k rent that goes in full to pay 10k in mortgage interest you would pay 40% tax on it (even though it is an expense and there is no “profit”) but you would get a 20% credit back so have to pay 2k tax on the 10k paid on mortgage interest.

We rent our house out but as neither of us are higher rate tax payers including the rent we receive we don’t have to pay tax on mortgage interest (or I think in the calculation we do but the 20% credited back cancels it out). We rent our house out on it’s existing mortgage under “consent to let” from our lender. Because we are not high earners it can be a strain on our cash flow as the rent received is a little less than the mortgage each month so any repairs/maintenance/landlord insurance/gas check/void we have to find the money from our wages as well as find the cash to pay the tax following our self assessment tax return each year.

Once you begin renting out your property you can potentially have a capital gains tax bill when you come to sell up. (Very basically) This is based on the increase in value from when you bought to when you sell apportioned to when you lived in it and when you rented it out. E.g. If the house has gone up 100k when you sell and was rented out half the time you owned it you would pay capital gains tax on half the increase less allowances such as an annual exempt amount. For us this means when we want to sell (one small house) the money we will have in hand won’t be enough for us to get ourselves an equivalent one small house to live in because we will lose a chunk of the value to tax. We moved far away and would one day like to sell and buy a new home to live in but even if we have paid off the house we are likely to need a mortgage again due to this.

There is no capital gains tax to pay if you have always lived in your house and not rented it out - it is exempt.

You need an EPC to rent out a property. If your EPC is less than C it might have to be brought up to C in a few years to be allowed to be rented out. Not quite as simple as that but if it is relevant to you look into it further.

We held on to our house as we were in no position to get another and had to move so it was a way to stay “on the ladder” but if you are in a position to sell up and buy a more affordable property I think that is a better position to be in than paying tax on rental income and tax on house value increases while renting yourself.

This would be easier if you don't mind a lodger in your home. You could rent to someone Mon to Fri who works locally & goes back their home on weekends
https://www.gov.uk/rent-room-in-your-home

When you sell you may be liable for capital gains tax as well.

BTL mortgages are quite hard to get at the moment as many lenders have left market. The interest rate can be higher as well.

You need to cost in remortgaging to a BTL

A family member is renting theirs out as air bnb whilst staying at another relatives house, they're saving for a camper van and will move into that soon to continue with the air bnb. They're doing quite well from it and air bnb means it's not as big of a commitment as renting it out on a 6 or 12 month contract. You could try that instead, even if you do it 6 months of the year if you live in a touristy area it could work out well.

Even less mortgages that let you airbnb it though.

Thank you savvy mumsnetters! I’d hoped this might help relieve the pressure, but feared it wouldn’t be as simple as that.

Thank you for all the great advice!

There are so many complications and risks with this, financial and other, not least the upheaval in your life. A further dimension of the risks involved is what could happen with the place you rent to live in while your house is rented out. You don't have a lot of control there.
The rent might be put up, scuppering your finances or the landlord might not do repairs or might come up with some unexpected bill for something, causing you to spend extra on things you shouldn't have to, further jeopardising your financial viability, or the landlord might suddenly decide to sell, (maybe refuse to return your deposit or part of it), landing you with the disruption and inevitable additional costs of having to up sticks and move to somewhere else. I know I'm like the voice of doom here but just highlighting potential risks, things that could go wrong, even if the whole scenario seems highly unlikely.