Lease Option Agreements - and change of use

THE QUESTION

If a landlord had a normal mortgage, with a Lease Option Agreement (LOA) to just rent the property rather than buying it, would they need to change their mortgage to a BTL/HMO/SA mortgage?

1) I assume they would. If they would, how have you found explaining this to the home owner?

2) What about those home owners who are on a really good rate from an old mortgage and changing would mean they don't get such a good deal?
Also with a LOA, say if the term is 5 years. Can you purchase anytime with the 5 years, so even after say 3 years?

THE ANSWER

The whole point of an LOA should be that is gives you the opportunity, but not the obligation, to purchase a property - and you can exercise that option at any point during the agreement.

But not all option agreements allow for that.

Actually there are LOAs and PLOAs. The P being the purchase part and, unless you have it written into the option contract that you have the right to purchase at a price agreed at the inception of the contract, you don’t have any right to purchase during the agreement - so pay attention to how you set up your contract.

A dose of reality is needed when you are dealing with landlords who have mortgages. This is the business end of LOAs, not the hype that you get on some LOA courses:

1. Most landlords will have a standard BTL mortgage that restricts tenancies to a single AST, a minority may allow up to 4 ASTs.

2. Unless the landlord has previously been operating as an HMO or SA, they are almost certain to have a normal BTL mortgage that prohibits use as an HMO or serviced accommodation.

3. Investment mortgages are invariably already set up on an interest only basis, so that the rental income exceeds the mortgage payment to provide a positive monthly cash flow.

4. Main residence mortgage will invariably be on a repayment basis, to reduce the loan to zero over the term of the mortgage.

5. The landlords primary desire is to receive rent from the property. Anything which
adds complexity to that is highly likely to be a disincentive for the landlord to engage
with you.

6. The chances of any standard BTL lender giving consent to run it as anything other
than what it is, a standard BTL, are next to zero.

7. Ask yourself how likely is it that any landlord will incur the costs of remortgaging - just so they can rent to you with your LOA. Arrangement, valuation, legal, broker fees will run into four figures. Now, factor in a less competitive interest rate for a more specialised mortgage, which the landlord will have to pay for the duration - would you do it?

8. Choosing to ignore all this in the pursuit of 'financial freedom' by breaching the landlords mortgage T&Cs can, and often have, resulted in the landlord getting a Cease & Desist letter from their lender with a clear choice a) revert to the approved usage b) get repossessed. Given such a choice watch how fast the landlord dumps you and your 'freedom' disappears in a puff of smoke.

To paraphrase an old saying - you will have to kiss an awful lot of landlord frogs before one turns into a landlord prince.

Unless you plan to operate your LOA on a single AST basis, you will waste an incredible amount of time pursuing landlords with mortgages and the deal will inevitably fall over when the cost of switching mortgages to remain compliant with your usage dawns on the landlord.

If you plan anything other than single AST usage, focus only on finding landlords with no mortgage. They will be harder to find, but you won’t waste your time on deals that will never happen.

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