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Hi all, I've had an offer accepted this afternoon but I think I might have a problem getting a mortgage. I had previously spoken to the local council and told them about the possible purchase and they said they would gladly take the property and guarantee me the rent every month directly into my account. Now the problem is the tenants could be a working family or on benefits and I cannot choose who I want in the property. My broker said I have been refused by one lender because it is a rent back guarantee and they will try more tomorrow. Is this going to be a problem going forward?

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Your options for finance are severely limited, most lenders do not allow Rent-to-Rent/Subletting/Corporate Let . You are looking at more commercial lenders that would consider this with manual underwriting.

Can I Sublet my Buy-to-Let Property? (Rent-to-Rent)

Property Investors often manage properties themselves or instruct an agent on their behalf. Though not all, there is another way.

Other property investors will rent to another Landlord perhaps a local business, local authority, housing associations or other Landlord.

A common phrase being rent-to-rent or SubLet.

Renting in this way will typically require a "special" mortgage given that your standard buy-to-let mortgage will permit renting on a single household basis usually with an only Assured Shorthold Tenancy (AST).

Buy-to-Let Lenders often do not permit other types of contracts.

On a survey of 56 Buy to Let Lenders:

  • 33 do not permit subletting
  • 09 had implicit restrictions
  • 14 permit subletting, in theory

With 25% allowing subletting we should tamper the excitement and suggest they too would be conditional.

One common condition was to allow the renting to Local Businesses only, who would rent to there employees. Some Lenders suggested that the employees would have to be named on the agreement. Other Lenders that it had to be a large corporate business with over 1,000 staff.

Other lending conditions were ensuring that the end tenant was "suitable" by there definition. Therefore preventing a contract with an organisation that houses "vulnerable people". Ruling out housing associations helping with drug rehabilitation for example.

We have had cases declined where the end tenant would receive Housing Benefits (LHA/Universal Credit).

Others buy-to-let lenders said it was by "case by case" basis.

As well as restrictions on the type of subletting organisation that will be permitted. Other typical mortgage conditions remain.

If an organisation wanted to use the property as an HMO or AirBnB, then you would require a mortgage that allowed both Subletting and HMO. That permitted Subletting and Airbnb.

Those landlords wanting to enter into these contracts will find the Buy-to-Let Mortgage Market Restricted. Limiting the products so you may not get the market-leading rates.

The takeaway from this article:

  • You can get mortgages to sublet.
  • The sublet mortgage market is restricted.
  • If you are subletting check your mortgage conditions.

:wub: Get Mortgage Advice from my Team at Bespoke Finance on 08009202001 or email hello@bespokefinance.info 
:ph34r: 
Please don't take my messages on Property Hub as Personal Financial Advice, just a rambling guy passing time on a Coffee Break.
 

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Make sure the broker is whole of market and clearly explains your intended purpose. Your lender market will be limited and it could be down to how the broker 'words' everything to the lender. 

You don't mention how long the arrangement with the council will last for. Maybe as them for a draft agreement so your broker can use this during their discussion with lenders. 

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Spoken to my broker again and they said they are making sure they get the right lender. The broker hasn't asked and I haven't mentioned how long the arrangement is for.

Thanks for the advice John, I appreciate it 

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Hi Paul, 

You mentioned "rent back guarantee" in your original post. Are you buying this property from the council? If not, why did the broker mention this phrase to you?

 

If you came to me, I would consider a number of aspects before trying to identify the right lender:

- the property itself (flat above shops or a detached house, construction type, leasehold length, etc. etc. etc.)

- who your tenants might be (e.g. working people, students or council tenants) and if there is the possibility that you'd rent to the council, I'd check this option specifically

- how much rent you might be able to achieve (this might depend on the tenancy type)

- your personal situation (long list of details, not just age, income, outgoings and credit history)

- any other special details (e.g. would you buy it in your personal name or in the name of a Ltd company)

 

Coming back to the potential letting to council tenants, indeed it's important to clarify who would sign the contract, for how long and how would you get paid, e.g. directly by the council or via the council tenant. The former is preferred, as people on housing benefit may decide to spend the money elsewhere. However, sometimes the council's rent payment is not enough and the tenant is required to "top it up", so it's important to check the details of how you'd get paid.

As Adam and John have already mentioned it, the lender options will be limited, but it's not necessarily a lost cause, so let's hope that your broker finds a suitable lender and you can complete the transaction!

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