Anyone who has looked at buying a property with the intention of renting it to a family member will know it’s not easy.
In fact, even if you already own a buy-to-let and want to let a relative move in you might find yourself scuppered by your mortgage lender’s terms and conditions.
But now a new mortgage has been launched by Mansfield Building Society that actively targets those who may want to rent a home to their children – or perhaps even their parents.
Family gathering: A new buy-to-let mortgage allows landlords to rent to their relatives, including children, parents and brothers or sisters
Mortgage lenders have always been a bit iffy about so-called family buy-to-let, and following a new rules in 2016 those loans that did allow it all but dried up.
Added to this has been stricter requirements that made it harder to get a buy-to-let loan since the start of last year, whereby higher rent to mortgage payment ratios could make it impossible to make the maths work.
However, Mansfield BS has bucked the trend and launched a new family buy-to-let mortgage allowing the borrower to let the property to their children, parents or other close family member and benefit from considerably lower rental cover.
The new deal means the borrower can charge their family tenant a rent equal to their mortgage payment – rental cover of 100 per cent in other words – making it a much more affordable option to help children or parents.
That is in stark contrast to the amount of monthly rent typically required by mortgage lenders, which many raised from around 125 per cent of mortgage payments to 145 per cent on the back of tougher mortgage industry rules at the start of last year.
What’s Mansfield offering?
The deal is a discounted variable rate over three years at 1.35 per cent below the society’s standard variable rate, delivering a current pay rate of 4.25 per cent,
This means that if the base rate goes up – which economists suggest could happen in May – Mansfield BS could increase its standard variable rate and your mortgage payments would rise.
Borrowers need a minimum 25 per cent deposit and there is a £199 application fee and a £1,800 completion fee to pay.
The minimum you can borrow is £50,000 and the maximum is £500,000. Early repayment charges are payable at 3 per cent of the mortgage balance for three years.
Borrowers must have a minimum earned income of at least £20,000 a year.
Because the rental income required is 100 per cent of the mortgage, borrowers need to be able to show that out of this earned income they could pay a bit more on their mortgage each month.
The borrower can charge their family member tenant a rent equal to their mortgage payment
If you’re a basic rate tax payer, you’ll need to show you earn enough to pay an additional 25 per cent on top of the monthly payments if the mortgage rate rose to 2 per cent above the pay rate – currently 6.24 per cent.
For higher rate tax payers it’s 45 per cent on the same terms.
This is because the Bank of England stipulates buy-to-let mortgage lenders must sure that landlords could cover their mortgage payments if interest rates went up in the next five years.
Mike Taylor, from Mansfield BS, said: ‘We’re launching this in response to identified trends which show the growing number of parents buying property for their offspring to live in – as well as the growing number of people buying property for their parents to live in.
‘With the housing market in a state of flux, this deal enables landlords, with sustainable uncommitted earnings, to support relatives without having to charge rental income over and above the mortgage payment just to meet a lender’s strict rental income calculations.’
The deal is available for borrowers looking to rent to children, siblings and parents.
A £150,000 mortgage on the Mansfield BS deal would have monthly repayments of £531.25 – however, this doesn’t factor in the hefty £1,999 fees. Over the three year deal period, paying off this fee would bring the cost of the deal up to £21,124.
Young house hunters may be able to save money by living in a parent’s buy-to-let
How does it compare?
Family buy-to-let mortgages are rare nowadays, with only a handful of smaller building societies tending to offer them.
Mostly, they’re tailored for parents wanting to buy a property and let it to their children while at university, and thus impose tight restrictions on who you can let to and how far away from their university the buy-to-let is located.
Loan-to-values tend to be low – less than 75 per cent – and maximum mortgage amounts also tend to be lower than Mansfield BS is offering.
There are also a few lenders that offer ordinary mortgages to those wanting to let their property to a family member, with Virgin Money being the most well known.
Unlike the Mansfield offer, these mortgages would be considered residential rather than regulated buy-to-let products.
David Blake, of Which? Mortgage Advisers, said: ‘Often with these cases, lenders treat the application like a residential property, as they understand the tenant will be paying a reduced rent. They therefore like applicants to have income of their own to sustain the mortgage.’
The Mansfield deal is different as, because it’s a buy-to-let, the mortgage would be interest-only and therefore mortgage payments are likely to be much lower than on a residential loan which would typically be capital repayment.
The interest rate, however, is relatively high compared to residential mortgages.
What to consider before becoming a landlord to your family
- Consider that the emotional stakes are higher if your child fails to pay the rent. Although you might be unlikely to run a credit check on your own children or parents, it’s important to carefully consider their financial situation and whether they will be able to meet their payments.
- It’s also advisable to draw up a tenancy agreement to set out the terms of the let and as proof of their right to live in the property.
- Your obligations as a landlord remain, too – regardless of who you’re letting the property to. You’ll need appropriate insurance, will have to keep up to date with gas safety checks and, if a deposit is paid, you’ll need to place it in a deposit protection scheme.
- If you’re letting your property to a family member for below market rate, you’ll need to consider the tax implications of doing so. For example, you might not be able to claim all expenses on the property as you could struggle to justify it being ‘wholly for business purposes’.
- If you’re considering buying a property to rent to your child, rather than using an existing home from your property portfolio, you’ll need to factor in the 3 per cent stamp duty surcharge for people buying investment properties and second homes. This expense can make a big dent in your budget, with an investment property worth £275,000 costing you £12,000 in stamp duty. By comparison, a first-time buyer would pay no stamp duty at all to purchase the same home.
- Source: Which? Mortgage Advisers
Could this mortgage be right for you?
This is an innovative mortgage that offers parents and children some much needed flexibility.
The advantages of the deal are that the person living in the property doesn’t have to undergo an income assessment by the lender.
This is useful if parents are planning to let to children at university for example, who may not be earning an income.
It’s also helpful for children who want to let to elderly parents whose income is variable or whose age prevents them from getting a mortgage.
It may also be attractive to those who own a property that they let and have family members who would like to become tenants, but are prevented from doing so by their existing mortgage lender.
Mortgages that help children buy are increasingly popular
Buying a property with a buy-to-let mortgage and renting it back to your children isn’t the only way to help them get on the property ladder.
Brokers report an increasing demand for joint borrower, sole proprietor mortgages.
These allow parents to use their income to help their child secure a slightly bigger mortgage, but they are not registered as an owner of the property on the title deeds. Ownership remains solely in the child’s name.
This has its advantages, as where parents already own their own home, buying even a share of another would be considered the purchase of a second property for tax purposes.
This would automatically subject the purchase to a 3 per cent surcharge on stamp duty payable. And, where children are buying their first home, there would be no exemption from stamp duty up to £300,000.
Not having parents on the deeds also exempts them from paying capital gains tax when the property is sold.
The loans are slightly more specialist than your average mortgage, so it’s a good idea to use a mortgage broker who will be able to compare the deals on offer from the handful of lenders that offer them.
These include Barclays, Metro Bank, Family Building Society and Hinckley & Rugby Building Society.