Letting to a Family Member
Letting to a family member can be a complicated process and with impending government legislation it can also be expensive if you get it wrong.
The good news is you will have options available to you if you wish to let to a family member. You may need to remortgage and there may be additional requirements you need to fulfil.
Let’s explore this complicated topic and break down all the information so it is easy to understand.
Is Renting to a Family Member Legal?
Renting to a family member is perfectly legal in the UK. However, if you have a residential mortgage, you may be breaking your mortgage agreement.
This means if you have a residential mortgage you will need to remortgage onto a Buy to Let product before you can consider letting to a family member.
For mortgage lenders, renting to family members is a higher risk and even some Buy to Let products will prevent you from doing so. This is because rental voids are more likely when letting to family as landlords are likely to be more lenient when collecting rent. Therefore, if rent is not collected on time, this increases the chances of the landlord defaulting on mortgage payments.
In most cases where you intend to rent to a family member, a lender will enforce stricter checks on the mortgage to ensure they cover this risk.
Do I Need a Tenancy Agreement?
Yes, you will need to have a tenancy agreement in place. You will also need to abide by all legislation required of landlords such as having energy efficiency and fire safety certificates for your property.
The tenancy agreement must be a proper agreement, affording your family member the same rights as they would be given if you were letting to a stranger.
As mentioned, there are currently legislative changes making their way through parliament that will put greater responsibilities on landlords, especially around no fault evictions.
Do I Need to Take a Rental Deposit?
No, you don’t need to take a rental deposit, but it is advisable. Rental deposits act as a security against any damage caused to your property. If you fail to take a deposit, you will have no recourse if your family member damages your property and refuses to pay for repairs.
If you do take a deposit you will need to:
- Put the money in a Deposit Protection Scheme
- Inform your family member which scheme holds their money (within 30 days of moving in),
- Inform your family member if you switch schemes.
Does a Deposit Protect Against All Damage?
No, there is a limited scope for repairs you can claim using a deposit. This is outlined clearly in the Tenant Fees Act 2019 and you should familiarise yourself with what you can claim for.
Damage attributed to wear and tear can not be claimed using a deposit.
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Can I Give My Family Member a Discounted Rate?
Yes, you can offer your family member a discount in theory. In application, you will struggle to pass the mortgage lender’s rental income threshold with even a small discounted rate.
Because legislation in the landlord sector has been changing rapidly over the last few years, lenders have become stricter with these rental calculations. You should prepare for the fact you may not be able to offer a discount and pass a lender’s rental income threshold.
Do I Still Pay Tax?
Yes, you will pay tax on your income minus any expenses. This will typically be the difference between your mortgage payment and the amount of rent you charge.
You will also be able to claim some repair costs as expenses. Bear in mind, tax legislation around claiming expenses as a Landlord is complicated and you may need an accountant to oversee your accounts to ensure you are declaring everything correctly.
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Mortgages and Letting to Family Members
If you have a residential mortgage, it will typically exclude you from renting the property out altogether. There are some narrow exceptions to this rule on a few mortgage products. Some residential mortgages prohibit having lodgers, but you may find your mortgage allows you to have a family member lodge with you.
If your intention is to rent out the property, you will need to switch from a residential mortgage to a Buy to Let mortgage. Even Buy to Let mortgages can exclude renting to family members and you should discuss your intentions with a mortgage broker.
Obtaining a Buy to Let when Letting to Family Members
A mortgage broker will outline your options and advise you on the best Buy to Let product for your situation.
You will also need to hold enough equity in your property or have additional funds to put down as a deposit on a Buy to Let mortgage. A typical deposit for a Buy to Let is 25% of the property value.
You will need to demonstrate to your lender that the rental income exceeds the mortgage payment. Historically, the rental income needed to be 125% of the mortgage payment but most lenders have extended this further due to current economic pressures on the rental market.
Be aware if you are switching from a residential mortgage to a Buy to Let, you may have Early Repayment Charges (ERCs). You can check your mortgage paperwork or ask your broker if you have an ERC.
Speak to a Specialist Mortgage Adviser
Letting to a family member is possible, providing you do everything correctly and charge your family member market rate for their rent. If you are tempted to cut corners you will find the process extremely frustrating and could find yourself with hefty fines or even imprisoned.
Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Brokerage. Boon Brokers offers fee free mortgage advice. Contact Boon Brokers to discuss the options available for letting to a family today.