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Answered on 19 August 2019 by Nick Morrey
Are you allowed to rent a house to a family member? And how would this affect my mortgage?
Whether you can rent a property to family will depend on your situation and if there’s already a mortgage on the property.
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 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.
If you want to let a property to a close relative, like a child or sibling, you’ll need either a mortgage for a second home or a regulated buy-to-let mortgage.
Second home mortgages are typical residential mortgages, they’re just labelled differently to distinguish the fact they’re on a second residential property and not a main residence. You need to declare that a family member will live in the property and pay you rent, when you first submit the application. Not all lenders offer second home mortgages, so it’s best to speak to a broker.
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. The way in which they differ is in the name; they’re “regulated” by the FCA. This essentially means they have tighter guidelines.
They have tighter guidelines because the FCA decided that taking out a mortgage to rent to family is closer to a typical residential mortgage than renting to a stranger. Your relationship with the tenant(s) makes you a riskier investment from the lender’s perspective. You may 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 few 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 mortgage for a second home than a regulated buy-to-let – and second home mortgages tend to be cheaper.
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.
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. You can ask your broker about how this stress test works.
Second residential mortgages are assessed differently. The amount you can borrow is based on your personal income. Lenders look at your income and outgoings like they would for a mortgage on a main residence, as they want to make sure you can cover both any existing mortgage and this second home mortgage if a rental void were to occur. They do this because your closeness to the tenant may increases the likelihood of rental voids – i.e. that there would be no income to cover the mortgage payments.
You should typically expect to put down at least 10% of the purchase price in deposit for a second residential mortgage and at least 25% of the purchase price for a regulated buy-to-let mortgage – 25% is the 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 a mortgage on that property and use the money to purchase this new one.
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 0344 346 3672 or make an enquiry.
Answers provided in response to Ask the experts 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.