The syllabuses of the mortgage advice qualifications contain reference to buy-to-let mortgages which have, of course, become a significant feature of the mortgage-lending scene over recent years, with many lenders putting together special packages aimed at this type of borrower. Generally, lenders base the amount that they are willing to lend on the anticipated rental income rather than on a multiple of the borrower's income. Buy-to let mortgages are not covered by the Mortgage Code.
However, students should remember that the exam syllabuses also make reference to the letting of mortgaged properties that are not purchased on a buy-to-let basis. Consequently, they should be prepared for examination questions on this topic. All lenders specifically exclude the right of borrowers to let a property in mortgage to them without their permission. Consequently, a borrower who lets a property without the permission of their lender is in breach of the mortgage and in default.
Tenants can represent a considerable risk to a lender. There are many cases where the condition of a mortgaged property has deteriorated significantly as a result of the actions of tenants. However, the most important reason for caution is that a tenancy can, under certain circumstances, become binding on the lender as well as the borrower. When a property has to be sold with a sitting tenant, its value will be significantly less than the market value with vacant possession.
However, requests to let a mortgaged property are not always rejected out of hand by lenders. Indeed, it can be beneficial to have a tenant living in a mortgaged property if, for example, the property would otherwise be empty resulting in the buildings insurance cover becoming adversely affected or even rendered invalid. In addition, if a borrower is in some financial difficulty, income from a tenant could mean the difference between keeping up the repayments on the mortgage and losing the property.
A lender's lettings policy will include a range of matters including, for example, the type of tenancy agreement that is acceptable. Most require an assured shorthold tenancy (short assured tenancy in Scotland).
A lender will only consent to the letting of a mortgaged property if satisfied about a range of matters including:
That the letting is for a satisfactory purpose and reason That the account has been conducted satisfactorily
That the tenant has no right to a permanent occupancy
That the rent is sufficient to cover the monthly mortgage repayments, taking into account any increased repayment arising from the new circumstances That a professional letting agent be used to handle the administration of the rental agreement and subsequent collection of rent There are, of course, borrowers who let their properties without the lender's permission. In many cases, these remain unknown to the lender. Indeed, in some ways it could be argued that the lender is better off in such circumstances. An unauthorised tenancy confers no rights of occupation, even if the rent is paid up to date. There have been a number of cases in recent years in which tenants have kept up their rental payments only to become homeless because the owner of the property has accepted the rent but not paid the mortgage. Under such circumstances, the tenant has no right to remain in the property.
If an unauthorised tenancy is discovered, the lender should not acknowledge that a tenancy exists. As the case of Stroud Building Society vs Delamont shows, even a letter sent by a lender to a tenant and referring to the addressee as 'the tenant' would be regarded as acknowledging the tenancy. This could then give the tenant a right of occupation and prevent the lender obtaining possession of the property. The best approach is to advise the borrower that he is in breach of the mortgage deed and that new conditions will apply until the breach has been put right.