What happens our mortgage rate if we rent out our home?

Q&A: Dominic Coyle

Your arrangement with the bank on this loan is governed by a very detailed contract that you and your sister will have signed off on when you first took out the loan.  Photograph: Getty Images

Your arrangement with the bank on this loan is governed by a very detailed contract that you and your sister will have signed off on when you first took out the loan. Photograph: Getty Images

 

Can my sibling and I approach our bank and ask them to switch our mortgage to a buy-to-let? I am finding it difficult to source any information on this.

The mortgage is in good shape. No repayments missed. Due to be paid off in 12 years’ time.

I am aware the interest rate would be higher – currently we pay 2.8 per cent. If the bank do consider this type of situation, how complicated a process is it? Also would there be a fee of some sort on top of increased interest rate?

We both work in permanent jobs. We are both married.

Ms N.M, email

There are lots of reasons why people’s mortgage position change. Job relocation or even the loss of a job can mean people are put in a position where they are now renting a property that was originally bought for their own use. And then there is the situation where people buy a home, live in it for a time before moving home but choosing to retain the old property.

Not everyone thinks of mentioning it to their mortgage lender, but they should.

Your arrangement with the bank on this loan is governed by a very detailed contract that you and your sister will have signed off on when you first took out the loan.

Exactly what events trigger an obligation to notify the lender will be set out in that document which is presumably hidden in some dusty file either in your own home or in your solicitor’s office. But I can assure you it would be very unusual if a decision to change the status of the property from principal private residence – i.e. owner-occupied home – to an investment property which is rented out for material gain was not included in that list.

And as you will have to register the property with the Residential Tenancies Board if you are renting it out, it’s quite possible that it would cross the lender’s radar in any case.

However, there is no need to be nervous about this. You ask whether you can approach your bank on the issue as if it is something they might frown upon. You certainly can: indeed I expect that you must do.

The way you put it seems to have an undercurrent of concern that the bank might refuse such a request. As with everything to do with contracts, I’m sure it is in the bank’s power to do that but this is not what happens in cases like yours.

So, yes, banks do consider such a proposition. It happens all the time and is something they are well geared up for. And it should not be a complicated process at all.

Wriggle room

They will certainly be happier if your loan to value is 70 per cent or less. Current Central Bank mortgage lending rules say banks should only extend a loan for 70 per cent or less on buy-to-let mortgages. There is wriggle room and you’re dealing with changed circumstances on an existing loan rather than new business but it would juts give the bank more peace of mind.

In any case, with just 12 years left on the loan I’d expect you should be comfortably under that threshold.

Will it cost anything extra. Well, if you want to get a better rate for a lower loan to value, they will probably require a formal valuation of the property and that will cost a small sum but nothing substantial. That aside, there should be nothing.

You have a mortgage that has been repaid fully and on time over a significant number of years. In other words, you are a good credit risk. As you say, you are both employed in permanent jobs and there is no question of affordability being the issue. If you’d been struggling to pay the loan and had missed payments they might be a little more questioning on your plans.

In your case your lender has had a good deal with you so far. You say you are paying 2.8 per cent currently and that you have roughly 12 years left on the loan. The time period indicates that you likely have equity in the property: your outstanding loan may even amount to 60 per cent or less of the current value of the home.

And that means your bank has been making out like a bandit on you and your sister in recent years. Even if your loans was just below 80 per cent of the current value of the house, you could have switched to a rate as low as 2.15 per cent fixed over four years. On a €200,000 outstanding balance, for instance, that would have saved you almost €1,000 a year.

In fact, not one of the lenders in the Irish market is currently charging 2.8 per cent on their most competitive product these days – even the least competitive ones.

At 60 per cent loan to value or below, you could have got a 1.95 per cent rate on your home loan.

So they have cause to appreciate your business and the inertia that has seen you paying more than you should on your mortgage over recent years.

Extra cash

That doesn’t mean they’re going to smile and say not to worry and keep going as you are. The bank will certainly increase the cost of the loan. They will happily bank the extra cash they should never have got off you and will apply the new, higher buy-to-let rate going forward.

How high that is depends on the loan to value and who your lender is. Over 60 per cent loan to value, the best current rate on offer is 3.95 per cent at ICS or Finance Ireland, rising to 4.80 per cent at Bank of Ireland, 4.85 per cent at AIB and even 4.95 per cent with Ulster Bank.

If your loan to value is now 60 per cent or under, the best rate will edge down to 3.75 per cent, rising to 4.5 per cent or above at most of the mainstream, with no added benefit from Bank of Ireland or AIB for the lower loan to value.

You have nothing to fear from approaching your bank: if anything failing to do so would be the higher risk position. Yes, the rate will be higher but it should be a straightforward procedure.

The one drawback is that banks are more reluctant to accept customers switching buy-to-let mortgages from one lender to another in search of better rates but you haven’t been chasing best value actively and your priority is to ensure your affairs are in order, so don’t worry about it. Just get in touch with them.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into

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