How can our mortgage company do this to us?

[lavenderbongo]

We are currently in NZ and renting out our property in the UK. This is not something we planned but an opportunity came up and we took it. The rent we make on our UK property is not enough to cover the mortgage so we are sending a few hundred pounds back to the UK each month to make up the shortfall.

Anyway we took out a ten year fixed term mortgage so that we knew what we were going to be paying each month and would have a bit of security. Anyway this morning I got a letter in the post from Nationwide telling me that because the property is being let out and has been for almost three years we will have to pay 1.5% interest on top of our current mortgage rate. That will mean an increase of a few hundred pounds each month. Something we can't afford.

I am writting this on the verge of tears. I have no idea what we are going to do or how they are allowed to do this. We could sell the house but this will not be easy and I am on the other side of the world! It seems totally illegal to me that you can suddenly introduce a new charge having signed a contract. They are going to loose money in the long term as we will have to sell the house.

Is anyone else in this situation or have any good advice it is a really depressing situation.

We've rented out properties for a few years now - not intentionally, circumstances change and it was in our interest to do so.

Anyway, after letting out a property for around 3 years it is common practice for mortgage companies to increase the interest rate to come more in line with a commercial mortgage. They are not in breech of contract - if anyone is you are as you decided to let out a property that you originally told them you would be living in.

Normally when you ask for permission from then just before you rent out they reply with a proviso of being able to review the arrangement on an annual basis.

Sorry, not at all what you wanted to hear but to me, IME it's no surprise. Have you considered increasing the rent a little to bridge the gap. Be honest, tell them your mortgage rate has increased.

Lavender sorry to be the bearer of bad news but I assume the property is insured? if so you should also tell your insurance company that it is rented out. The reason being a good number of insurance companies charge more for rented out properties, especially fully furnished ones.
If you think about not telling them then I would advise against it as this could invalidate your insurance and they could void the policy resulting in non payment in the event of a claim.

This ins't a new thing, they've done this for years.

"Incidently we have always paid our mortgage and pose no risk to the mortgage company. We only own one property we are not exactly a big business. " That may well be the case but unfortunately as a non-resident you are more of a risk and by your own admission cannot afford increased payments. You may find that as you have varied the original terms by renting out, having told them or not, so can they. Perhaps you can agree to keep the current temr sfor a period while you try to sell if they won't otherwise budge?

Also, please check out the penalties for early redemption if you do sell. It may well be worth keeping it, at least until redemption penalties reduce in the later years

Good luck

Another consideration if you decide to sell is capital gains tax. The press has been full of it going from 20% currently to 40%+. If you've lived out of the property for more than 3 years you will have to pay this.

Lavender, if you have proof that you informed them then at least they won't be able to back-date the interest, and you might be able to argue that they shouldn't increase the rate and at least come to a compromise on the increase.

Have you got something in writing, or the rough time/date if you rang them? In my experience, if you can show you made a reasonable effort (e.g. rang them to inform them and give details of when/who you spoke to), even if you haven't completed fulfilled what would legally be considered the required amount of paperwork (so in this case, having a letter from the company stating they are happy for you to let out the house and are willing to maintain the same terms) they will be willing to compromise.

Agree with the above posters, if you have still got the same insurance policy you took out when you originally took out the mortgage please please please change it to a BTL policy as soon as possible - you will not be covered at all if anything happens e.g. if the house were to burn down today the insurance company would not pay out but you would still owe the mortgage. Seriously, do this in the next day or two!

thanks for all the replies - I really appreciate the imput.

We have insurance specifically for rental properties - we have done everything by the book. The letting agency we used made sure that we did. I am searching for the communication from the mortgage company. I wrote to them and spoke to them on the phone when we first informed them about letting the property.

We have a large mortgage and the rental we are charging at the mo is at the top of what we could reasonably charge so we cant really increase it. We will probably try to negotiate paying an interest only mortgage until we sell. Thanks for the info re capital gains tax - that had not occurred to me at all.

So if we keep our property for more than three years, then sell it, we're liable for CGT. Does anyone know if this would be from the point we bought it, or the point we moved out?

It has been from the time you moved out ie when it ceased to be your principle private residence. The system changed a few years ago though so not sure if it applies in same way as you could then claim relief for the number of years you owned it. There is an annual allowance you can offset against any gain so if it was bought in past 5 years or so your liability could be minimal as property prices haven't gone up significantly in many areas.

As far as I'm aware, there's no tapering allowance under current CGT rules.

According to the HMRC website the final three years that you own a house for will qualify for full relief from CGT if you used the house as your main/only residence at any point.

If I've read it right hopefully you shouldn't have to pay any CGT at all

Thanks guys. I couldn't find anything on the HMRC website about what happens if you keep it longer than the three years. We're having a bit of a wobble with NZ at the moment but want to stay longer so we get our returning resident visa. We don't want to sell as we'd like to track the UK market and it is a really good house in a good area. (Can you tell I miss it living in the land of no central heating?) We think our house went up about 50K from when we bough to when we left the UK. It's been up and down since but it's probably about that now. We may just have to plan to live in it again at some point if/when we go back.

If you keep it longer than 3 years, part of the gain will be liable to CGT but that will only be for the period in excess of 3 years let - that is, the gain will be apportioned over your whole period of ownership and only that bit for the letting period in excess of 3 years will be chargeable.

CGT:

(1) you don't pay CGT for any price gain during the period you were living in it

(2) you don't pay CGT for any price gain during the last three years of ownership

(3) you don't pay CGT for a capped amount of price gain during any period it has been let - that capped amount is the amount of gain that got relief under (1) and (2), or £40k, whichever is lower.

Anything not covered by (1) (2) or (3) you will pay 18% CGT on.

Those are the current rules anyway. Who knows how they will change when the budget comes through later this month...

Mortgage:

I'd think that if you told them about the letting in the first place, and they didn't raise the rate at that point (or reserve their right to raise it later), you'd have a pretty good argument that they shouldn't raise it now. It's definitely worth arguing.

However at the end of the day it's no longer an owner occupier mortgage so it's not what you signed up to and they are probably within their rights to make changes.

Thanks. That CGT situation doesn't sound too bad. I think it's reasonable to pay for the time it's been a BTL but not keen to pay for the bit when it was our home. I suspect we may end up living in it if/when we go back anyway. Even if it is just to renovate to sell.

So Minipie; we have sent abroad by HMG for dh's job. We own and rent out our family home and rent from HMG here, but will return to the house when dh's tour ends. We have owned the house for 18 years, and we lived in it for 14 of that to date. Are we liable to CGT as well when we come to sell? We may sell it when we're in our 70s, but not yet.

Oh gosh. Scaryteacher, I am sooo not a tax adviser - the above is what I found out when researching what to do about DH's flat that we let out for a while.

It really depends how long you rent the house and how much gain it makes while you rent it out. Basically if it makes more than £40k gain while being let out, or more gain than it made during all the years you live there, then I think you would potentially have a CGT liability when you come to sell. (However it could be that the £40k limit applies to the CGT rather than the gain itself - not sure).

But as I said, they are looking at changing the CGT rules anyway, so this could all change.

and of course you really really should speak to a proper tax adviser...

scaryteacher - is your DH in the armed forces, if so I believe that different rules apply. I think you can still keep your house designated as your principal private residence all the time you are renting it out because you are abroad on tour of duty.

Thanks Minipie. Yes he is Hippo...nice to know different rules apply for some things!

OK, checked out HMRC website.

If you are working abroad, all of the period you are required to carry out your duties outside the UK,( or in the UK but too fara way to be able to live in the house, or if your job requires you to live elsewhere, such as in job related accomodation) can be left out of being charged to CGT as you qualify for PPR.

Conditions apply:

• You must have have lived in the house at some point before going abroad, and you do return to live in the house after the period of working abroad ends UNLESS your job still keeps you from living in the house up until the time you sell it.

There is no time limit to the period you can be absent if working outside the UK, but the absence is limited to 4 years if working elsewhere in the UK or if required to live in job related accomodation.

If you buy a house while in job related accomodation which you intend to live in at some point, eg on retirement, you can designate this as your PPR and, as long as you intend to live in it, even if you eventually sell it without ever hsving lived in it you qualify for full PPR.

Scary, though I can't find any specific references to the forces, the fact you DH is working abroad means this covers you for any period abroad.

OP, all of your period working abroad would be PPR and, if when you return to the UK you cannot move back into the house and need to sell it because your job prevents it, you still get full PPR for the whole time you are abroad, and for another 4 years if you then need to work in another area of the UK.

here is the thread about it on Martin's Money Tips, there may be some info on it. Also you can look on that site for somewhere to switch mortgage to.

Thanks Hippo, I'm in the middle of ploughing through the GCSE marking and have fried brain, so the HMRC site was too much for me today. I assume it will be different for HM Forces as it is normal to be posted away in excess of 4 years from your home base, so HMG can't penalise us for where they choose to send us.

Scary - yes possibly, though can't find specific advice for forces on website. Best thing may be to ring up the HMRC to get specific advice for you - you need to contact your own tax office but can find which is your office and the phone number from the website.

If you are abroad on posting no time limit, but if the posting is in the UK you need to find out the rules. May come within the Job Related Accomodation rules?

OMG - is that you lavender? from many years ago??

No, just looked at your profile and you're not.