Landlords thinking outside the box could consider the increasing trend of splitting their own homes in two to rent the other half.
According to the most recent data collated by Communities and Local Government (CLG), there were 18.5 million separate owner-occupied homes across England and Wales in 2007. This compares with 16.8 million a decade earlier.
“While some of this rise can be attributed to a general increase in homeownership during this time, the figures are also likely to reflect the number of single homes multiplying into two or more properties,” said Bernard Clarke at the Council of Mortgage Lenders.
This is especially the case in London, although anyone wanting to do this will need planning consent to divide their home into two or more properties.
“The property will obviously need to be big enough as well as meet building regulations in terms of access; for example, where new doorways and staircases are situated,” said Paul Marsh, the past president of the Law Society.
But even a textbook application may not be passed if it does not fit with local authority requirements, said Marsh.
“You may not be permitted to convert a large Georgian house in London's Richmond into flats as it would not be in keeping with the area.
“But in other locations, you would not be permitted to convert several existing flats back into one big property due to a high demand for housing. Each local authority will have its local legal regime established.”
In most cases, properties will need to undergo major renovations in terms of adding kitchens, bathrooms and separate access.
“As you are changing the nature of the property against which the mortgage is secured, you should first seek permission from your lender,” said David Hollingworth at mortgage broker London & Country.
And if you want to borrow more against a home to fund the renovation, success with an existing lender will depend on exactly what is being carried out and how much equity is stored in the home.
“It could be that you have to move the entire funding to a different mortgage provider that can lend in stage payments, such as self-build where additional funds are released as the project progresses,” said Hollingworth. “This means you will also have to consider any early repayment charges that may apply.”
Each separate residential home will also need to be recorded with the Land Registry. If a home was sold or even re-mortgaged since the mid-1990s, it will have come under compulsory registration.
But as soon as it becomes two homes with the purpose of selling off the new one, the owner will need to apply for a ‘transfer of part’ or - if the home is to be rented - a ‘leasehold registration’.
According to accountants PricewaterhouseCoopers, whether a landlord rents or sells the newly created property, capital gains tax would be incurred on its sale.
This is because, in either case, the extra property would constitute a second home the landlord never lived in.
However, post-credit crunch more landlords are left with little choice but to divide a property, says Mark Posniak at Drawbridge Finance, a specialist finance company.
“In what is still a difficult property market, people are finding ways to make the most of what they have,” he said. “This is why we have seen a considerable upturn in the number of property investors applying for ‘refurbishment finance’ to fund splitting their existing property into two or more homes.
“In some cases, the new home is sold off but most landlords retain them and benefit from the higher rental yield.”
Posniak added that, while planning permission is difficult to get, the biggest problem is sourcing funding for the work.
This is why experienced property investors use bridging finance with rates ranging from 0.99 percent to 1.5 percent every month.
