Buying a new home and renting out an old home
Do you want to rent out your current home and buy a new home? At Bliss we can help you with this.
We are increasingly receiving questions from customers who are considering keeping and renting out their current home. But there is a lot involved, so you have to ask yourself whether it is an interesting option for you.
Points of attention renting out current home
- Lender’s permission required.
- Convert to rental mortgage (and possible fine).
- Other permissions: home insurance and Owners’ Association (VvE).
- Budget new home may be limited
- Influence on your new mortgage:
equity not available, maximum mortgage limited and affordability of both mortgages
- Limited choice of lenders.
- Risk profile: does this type of investment suit you?
Keep and rent out your current home
If you are going to buy a new house and you or your partner already have an owner-occupied home, then you have to do something with this. In most cases, you will put the house up for sale by engaging a sales agent. When the house is sold and you may have some surplus value, you can invest this in the new house. With the help of a bridging mortgage you can even get the surplus value advanced. In some cases, it is considered to keep the current home and start renting it out, so that you have some rental income in the future.
In that case, there are a number of points to keep in mind:
The first is if you do not sell the house, the current mortgage continues to run. This keeps you connected to the lender that currently provided the mortgage. If you are moving and you want to rent out the house, you must ask permission from the lender. You will usually not receive this permission in practice. This has to do with the fact that mortgages for houses you live in are very different from mortgages for houses that are rented out. This second type is called a rental mortgage. Also called an investment mortgage or a buy to let mortgage. This type of mortgage usually has a higher interest rate, a few percent more and stricter requirements for the maximum financing. Where you can often finance 100 percent of the value of the house with ordinary homes that you live in yourself, with homes for rent, this is maximized at 90% of the value in rented condition. The market value in rented condition is often lower than the value in unlet condition. In other words, the value if you live in it yourself. This means that in practice you can get about 50 to 70% of the value in unlet condition as a mortgage if you plan to rent out the property.
This means that a large part of your current mortgage must already have been repaid or that you have to pay off some extra to ensure that you can transfer your current mortgage to a rental mortgage. You also have to think about this transfer, namely a possible fine.
For example, if you bought a house five years ago and fixed the interest for 10 years, you actually still have a commitment for 5 years because of the interest contract with the current lender. If you transfer the house to a rental mortgage before that time, the current lender may be charged a fine for the missed interest income. Always request a pro forma repayment note from your current provider, so that you know what the fine will be.
If you have an apartment, ask the Home Owners Association (VVE) whether rental of the home to third parties is allowed and also check with the insurer of the home insurance whether rental is allowed. It may be important to switch insurers to ensure that the leased collateral is properly insured.
In addition, keeping the current home for rent also has consequences for the financing of your new home.
First of all, the influence on the new mortgage has to do with the equity in your current home, which then becomes unavailable if the house is not sold. Then the equity is not released and you cannot spend it on the purchase of a new house. As a result, your budget for a new home is somewhat lower.
In addition, your maximum loan is also limited. That has a number of reasons. The first is the bijleenregeling. If there is equity in your current home, and you do not invest this in your new home, because you are not selling the home. Then you lose part of the right to mortgage interest deduction. The Dutch Tax and Customs Administration assumes that you will sell the house. And that the equity is transferred to the new home. If you do not invest the equity, there is less mortgage interest deduction. For the part that you do not invest, you lose this right. That also means that you can borrow a little less.
Furthermore, a new lender will want to see that you can not only pay the new mortgage, but that the current mortgage costs also remain affordable. After all, this continues and it is important that you can continue to bear the burden. You must therefore have enough income to be able to fully pay two mortgages side by side. In practice, this will of course often not be necessary, since the house will be rented out and there will be rental income in return. It is important to know that lenders do not take this into account when applying for the new mortgage. After all, there is no tenant yet, there is no rental income yet. This is really a traditional chicken-and-egg problem. Until then, you must have enough income to pay for both mortgages yourself.
Finally, there is also a limited choice of lenders. Some providers of new mortgages require you to sell your old home. You are therefore not allowed to keep your old home for rental purposes. It is also important to realize that if you are going to rent out your current home, you will actually be investing in real estate. It’s a kind of investment. If there is still a mortgage on your own home, you are in fact investing in real estate with borrowed money. Carefully consider in advance whether this is the way you want to achieve a return on your assets and whether the associated risks are appropriate for you. Due to a combination of these factors, it is often wise to put the house up for sale.
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Would you rather contact one of our advisors and discuss your personal situation further? Then immediately make a non-binding call appointment. At Bliss we are happy to help!