Should I sell or rent out my house?

When you buy a new home, you normally have to sell your current property, especially if you need the money to buy a new one. But it can make practical or financial sense to keep the old home. If you rent your old house out rather than sell it, you could end up over time with a valuable asset that generates a regular income. Here's what to consider when deciding whether to sell or rent out your house.

When does renting out rather than selling make sense?

It can make more sense to rent out your current home rather than sell if:

• You are moving temporarily, perhaps for work, and you want to keep the option of moving back to your old house.
• You have enough money that you do not have to sell your current home to afford to buy or rent your next home.
• It is an attractive rental property likely to generate good rental income.
• You are confident property prices are going to rise.
• You are comfortable taking on landlord responsibilities — See the Renters’ Rights Bill for what to expect.

You’ll need to do some groundwork before renting out your home to make sure it works financially. The first step is to get an idea of how much you may be able to rent your house for by using our free rent calculator. Next, do further research by looking online to see how much similar properties are being let for. And, it’s a good idea to get a few estate agent valuations as well.

Use our Rent Calculator to get an idea of how much rent you should charge based on your property type, location and local demand.

What will happen to property prices?

The critical question in deciding whether to rent or sell your house, is what is likely to happen with house prices. And, how quickly you need to sell. If property prices are rising, it may be worth building up a property portfolio. But if property prices are falling, your old home will go down in value. In the short term, you would probably be better off selling it than renting it out.

Over the long term, property prices generally rise (along with economic growth and incomes). So, if you are planning to keep your old home for many years, you shouldn’t worry about a short term dip in prices.

See our House Price Watch report for the latest trends in house prices.

Will your mortgage company let you rent out your house?

When deciding whether to rent or sell your house, you need to check the small print of your mortgage to see whether you are allowed to rent out your home. Most mortgages include a clause that does not let you rent out your house.

As a short term solution, your mortgage lender may grant you a Consent to Let which allows you to let your property, usually for a maximum of 12 months, while maintaining your current mortgage.

If not, you may need to take out a Buy to Let mortgage. This may entail paying an early repayment charge if you are leaving your current mortgage mid-way through your deal, valuation survey fees, and new mortgage arrangement fees.

Alternatively, you may consider a Let to Buy mortgage. This involves taking out a Let to Buy mortgage on your current property and a standard residential mortgage on the property you want to buy. With Let to Buy, you can release equity from your current home and put this towards the deposit for the home you’re buying.

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How to finance two properties?

The decision to rent or sell your house also depends on your financial position. If you are already financially stretched, and not confident dealing with financial matters, then you could end up really regretting it.

You may be more likely to be able to buy a new property while keeping your old one if you have a large amount of equity in your existing property, and a sufficient income to easily finance the mortgage on your new property.

However, what’s right for you will depend on your circumstances so it’s a good idea to get advice from an independent financial adviser as well as a mortgage broker.

Can you afford the mortgage & rental costs?

When deciding whether to rent or sell your house, you should also take into account whether you can afford the monthly mortgage payments, as well as, the costs of maintaining a rental property.

Your mortgage lender is likely to insist that the rental income is enough to cover the mortgage interest payments but you should bear in mind the costs of managing a rental property.

Other rental property costs to consider:

• How many months of the year are you likely to be able to rent it out? As a rule of thumb, you should plan for one month a year where it will be unrented. For example, when you are looking for a new tenant.
• Will you be able to cover the mortgage if you are unable to rent it? You should be confident you could avoid a forced sale or repossession if you have difficulty renting it out for a while.
• Will you be able to pay for the property’s maintenance? Can you afford a new boiler? What if the house gets damp? Or if it needs a new roof?
• Will you manage the property – or will you pay somebody to do so? How much will that cost?
• Will you rent it through an agent? What commission will they take?
• Have you factored in insurance into the total monthly costs?

For more advice, see our ultimate guide to renting out your home.

How much will it cost to rent or buy your new home?

The ability to afford to keep your old home will depend not just on the rental income you get, but the cost of living in your new home.

• How much will your new rent or mortgage be?
• Have you included the cost of moving house, such as the second home stamp duty surcharge, conveyancing fees and survey costs?

Will I have to pay income tax?

From April 2017 landlords have to pay tax on their entire rental income (not just the profit). They can only claim tax relief on mortgage interest at a rate of 20%. Regardless of what income tax band they’re in. A landlord in the higher tax band, will pay tax on their rental income at 40% or 45% but will only be able to claim 20% tax relief. For more tax advice, use our free tool to find financial advisers.

Will I pay capital gains tax if I sell?

Capital gains tax is a tax on the profit – or ‘gain’ – you make when you sell an asset that has gone up in value.

You do not have to pay capital gains tax if you sell your primary residence (i.e. your main home) at a profit. But, you might have to if you sell a second home. The capital gains tax regime is frequently changed by the government, and the calculations are complicated, so you should seek advice either from a tax adviser or directly from HMRC.

Capital gains tax rules:

• You don’t pay capital gains tax if you are not selling the second property at more than you bought it for. Or indeed, if you don’t sell it at all.
• If you used to live in the house you are selling, capital gains kicks in eighteen months after you move out. If you sell it within that time you don’t pay any capital gains tax.  
• You only pay capital gains tax for the period you have not lived there (minus the 18 months). This is worked out pro-rata as a proportion of the total gain in the value of the property while you have owned it.
• The rate of capital gains tax is tapered. The longer you own something, the lower the rate you pay. There are annual allowances, so the total tax bill may be less than you first expect.

For more detailed information, check out our guide on Capital gains tax when selling a home