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Will my client go to prison for remortgaging their property?

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  • 17/11/2003
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My client bought a flat with a mainstream mortgage but ended up renting the property. If they want to remortgage will they have to do so on a buy-to-let product? If they move to a mainstream deal, are they being fraudulent?

I am assuming the client purchased the property with the intention of occupying it and their circumstances changed to such an extent that it was let instead.

Irrespective of whether or not the client chooses to proceed with a remortgage you should advise them to notify the existing mortgage provider of the current situation because it is likely that the client is in breach of contract. In addition it is likely that the property is not adequately insured in that the buildings insurance may be for residential cover and not for letting.

This effectively means that should there be significant damage to the property as a result of an insurable risk, such as fire, this may render the policy invalid hence the security is at risk. The downside of this risk far outweighs the relatively small benefit that may result from the lower monthly mortgage repayments on a mainstream mortgage.

Depending on the LTV the client may be able to obtain a mainstream mortgage from those lenders that will permit a property to be let but it is likely that a buy to let deal will be the most appropriate and such a product will present a much smoother application process. In addition, the pricing differential/loading on a buy-to-let scheme is much smaller than it used to be so there seems little incentive for the client to be dishonest.

The penalty for the client for misleading the lender – insurance risk aside – is unlikely to be too onerous, probably a change in deal, maybe some backdated payments and perhaps an admin fee. I would have thought the likelihood of legal action is minimal especially if there has been no problem with the repayments.

However, it would be totally unacceptable for the intermediary to encourage the client to submit a fraudulent application so it is a non-starter.

This situation is not uncommon as there are many people who buy a house to live in as their personal dwelling but who, due to a change in circumstance, find they may need to move elsewhere and prefer not to sell the property but to let it to a tenant. Alternatively, an individual may simply see an opportunity to let part or all of their property to increase their overall income.

Any change in use of the property of this nature should be advised to the lender immediately as this varies the terms on which the mortgage was granted in the first instance. This client should have come clean on the move to renting the property when it first happened. If they now wish to re-mortgage, they must do so on a buy-to-let basis, assuming that there is sufficient equity in the property – that is a minimum of 15%. The payable rate on buy-to-let re-mortgages has become very competitive and not too far from the mainstream rates available, so they would be well advised not to risk making a fraudulent statement on his application form.

Apart from anything else, the valuer may become aware of the tenancy on the site visit and report as such to the proposed lender, which would lead to a decline on the basis of false information supplied on the application form.

If this client should choose to pursue and obtain a mainstream mortgage on this property and the lender subsequently finds out, the most likely outcome is an immediate withdrawal of the mainstream rate and transfer to the correct buy-to-let terms, possibly back to the original date of completion.

Whether the lender takes any further action would be down to their own policy in these situations but I suggest that legal action is unlikely, provided that monthly payments are up to date. Technically, this client is in breach of the terms of the mortgage and the lender would have the right to seek possession and exercise sale but this would be complicated by the presence of the tenant and the courts may look to protect the tenant right of occupancy.

Having made the decision to rent and not inhabit the property, the client should have told the lender of their decision straight away. This would have avoided any confusion and meant that both they and the lender knew exactly where they stood.

The client will almost certainly be in contravention of their mortgage conditions and may well be invalidating their buildings insurance due to non-disclosure, and goodness knows insurers do not need much of a reason to invalidate a claim.

If the client now wishes to remortgage, I would suggest that they are completely upfront and remortgage using a tailored buy-to-let product thus ensuring that the buildings insurance affords appropriate cover to avoid being left footing the insurance bill should anything happen to the property.

The way the buy-to-let market has evolved means that the client will not pay a large premium for this type of mortgage so the gap between a buy-to-let and mainstream residential mortgage will not be large and even so the mortgage is an allowable expense as is the buildings insurance so the costs can be offset against profits.

If the client remortgages using a mainstream product knowing that they will be renting the property they will indeed be committing fraud as they will be lying to the lender and the insurer and completing a false declaration. I am not fully aware of the likely punishment but if the lender or insurer chose to prosecute then at best a significant fine could be imposed, at worst a prison sentence.

You may argue that the client was not aware of their obligations or responsibilities, however, in the eyes of the law even ignorance is no defence. My advice is to come clean and set it up properly it is not worth the risk.

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