Can I Buy a House and Rent It to a Family Member?
Answered on 5 May 2023 by Nick Mendes
Can I rent my house to a family member? And would this affect my mortgage?
Whether you can rent your house to a family member will depend on your situation and if there’s already a mortgage on the property.
- Own a property outright and there’s no mortgage left to pay on it, then it’s yours and you can rent it to whomever you like
- Already have a residential mortgage on a property that you want to rent out, you need permission from your lender to rent it to anyone, including a family member. Not all lenders will grant you consent to let, especially to family, so ideally you would have checked with them before you took out the mortgage if you thought this could be a possibility. If you rent your property to family without consent from your lender, you would break the terms of your mortgage and possibly incur penalties
- Want to buy a property with the intention of renting it out to family, then you'll likely require a regulated buy-to-let mortgage
There are some challenges that come with obtaining a mortgage on a second property you want to let to a family member.
Firstly, there’s the dynamic. How will the landlord/tenant relationship work? You’ll need to decide who’s responsible for what. If you opt for a regulated buy-to-let mortgage, then your lender will require that an AST (assured shorthold tenancy agreement) is in place.
Secondly, there’s the longevity of your agreement. Will you eventually want to transfer ownership to the tenant? If that’s likely, you can’t simply add them to a regulated buy-to-let mortgage as that’s against the rules. In this circumstance, they may need to take out a new residential mortgage on the property at a later date and purchase it from you. What’s more, adding someone to a mortgage usually involves adding them to the title deeds, thereby transferring ownership from a sole name to joint names, which may incur Stamp Duty.
Thirdly, the mortgages available to you may be limited, depending on your relationship with the tenant. We explain this in more detail below.
Do I Need a Buy-to-Let Mortgage if the Tenant is a Family Member?
If you want to let a property to a close relative, like a parent, child or sibling, you’ll need a regulated buy-to-let mortgage.
Regulated Buy-to-Let Mortgages
Regulated buy-to-let mortgages are slightly different from typical buy-to-let mortgages as they’re specifically for people who are renting property to immediate family or those who have become accidental landlords through inheritance or a change in circumstances. The way in which they differ is in the name; they’re regulated by the FCA. This essentially means they have tighter guidelines. Regulated buy-to-lets are also known as CBTLs (consumer buy-to-lets).
For a regulated buy-to-let mortgage that's suitable for letting to a family member, the lender will want to make sure you can afford the mortgage based on your personal income - not just the rental income. This is because your relationship with the tenant(s) makes you a riskier investment for the lender. For example, from the lender's perspective, it's more likely that you could relax the terms of the tenancy if the tenant is a family member, which could affect the condition of the property and the income you receive from it.
Nonetheless, regulated and traditional buy-to-let mortgages do share some similar criteria, as the several lenders which offer the former usually do so as a subset of the latter.
The market for regulated buy-to-lets is restricted due to the additional regulatory requirements this type of lending attracts and the fact that not all lenders have the resources to cope with it. You’re much more likely to find a suitable regulated buy-to-let mortgage if you use a broker.
It’s worth noting that there are lenders that’ll consider a traditional buy-to-let mortgage where the tenant is a somewhat distant relative of the landlord, like a cousin or aunt.
How Much Can I Take Out?
For both normal and regulated buy-to-let mortgages, the size of the loan you’re able to take out largely depends on the open market rental for the property you want to buy, as rent should cover 125% - 145% of the proposed mortgage payments at a nominal stress test rate. If you're renting to a family member, the lender will also consider your personal income as part of the assessment. You can ask your broker about how this works in more detail.
You should typically expect to put down at least 25% of the purchase price for a regulated buy-to-let mortgage – 25% is usually the minimum amount you would need in deposit for any kind of buy-to-let mortgage.
If you already have a lot of equity in another property - such as your main residence or a buy-to-let you already own – you could raise money via a remortgage on that property and use the money to purchase this new one.
Find Out More
For more information on purchasing a buy-to-let property, see our Buy-to-Let Guide. It explains everything you need to know about how buy-to-lets work, deposits, additional costs, tax relief and more.
Or, have one of our mortgage advisers explain everything in more detail. Simply call us on 0330 433 2927 or make an enquiry.
Ask The Mortgage Experts answers are based on the information provided and do not constitute advice under the Financial Services & Markets Act. They reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them. We recommend you seek professional advice with regard to any of these topics where appropriate.