A Guide to Family Buy-to-Let Mortgages
You may wish to use a family buy-to-let mortgage to let a property out to a close relative, but there are still mortgage criteria that need to be met and tax implications to weigh up. Read this guide to learn what to consider before applying as well as some of the pros and cons of this type of deal.
When you buy a property to rent out, you will need to use a buy-to-let mortgage rather than a standard residential one.
However, if you are buying a property to let to a member of your family, then lenders will view the risk differently and you will need a family buy-to-let mortgage, otherwise known as regulated buy to let mortgage.
Here, we explore everything you need to know about family buy-to-let mortgages.
What is a family buy-to-let mortgage?
Lenders have strict rules for landlords around letting to family members on standard buy-to-let mortgages – this is because you are likely to treat your loved ones differently to how you would treat tenants you don’t know, typically by charging them a rent that is below market rates. You may also be tempted to be flexible with rent – particularly if they are struggling.
This makes a loan set up on this basis riskier for both the lender and the borrower. For this reason, specialist family buy-to-let mortgages have been developed.
Applications are assessed in a similar way to residential mortgages and, unlike standard buy-to-let mortgages, are regulated by the Financial Conduct Authority – as such, you may also see them referred to as regulated buy-to-let mortgages.
This means you need to demonstrate that you can afford repayments without relying on rental income. You are also likely to need a larger deposit – of around 25% – and the loan may only be available on a repayment basis, unlike standard buy-to-let loans that are often interest only.
» MORE: Tips for saving for a house
Who might need a family buy to let?
A popular use for a regulated or family buy-to-let mortgage is for parents to purchase a property and rent it to their child, while they are at university for example, or just starting out at work. It might also be used if you have elderly parents that need to move somewhere smaller.
In contrast to ordinary buy-to-let loans, family buy to let also allows you – the landlord – to live in the property as well, should you need or want to.
It’s important to note what constitutes family members from the lender’s point of view. For example, if you are letting to a close family member, such as a parent, child, grandparent or sibling, a family buy to let would be required.
However, if you didn’t need to live in the property and were only renting to aunts, uncles or cousins you could still potentially use an unregulated buy-to-let mortgage - always check the terms from the lender before you proceed.
Similarly, you may not need a family buy-to-let mortgage if a family member is occupying less than 40% of the property. This might be the case, for example, if you are buying a student property and are only letting one of a number of rooms to your child.
What to consider before you apply
Although a family buy to let may appear to offer you the solution to your housing challenge, there are a number of issues you will need to consider first.
First of all is tax. As it’s a second property you will usually have to pay a 3% stamp duty surcharge on the purchase. Depending on your circumstances, there may also be capital gains tax implications when you come to sell.
You should also be aware of changing tax rules for landlords – with changes to mortgage interest tax relief rules having a significant impact on higher-rate and additional-rate taxpayers. This is because tax relief at the landlord’s rate of tax has been phased out and replaced with a flat 20% tax credit.
You may also struggle to claim tax relief on business expenses if you are letting to a family member at bargain basement prices.
You should also consider all the responsibilities that being a landlord brings. Finding tenants may not be a challenge if you are letting to family, but you will still need to have a full and proper inventory and be able to manage and maintain the property.
This can be more challenging in student properties, which usually need to be fully furnished and could potentially be less well cared for. It’s also worth bearing in mind that getting your child to be the landlord in your absence could be quite stressful – especially if they are still only a teenager themselves and renting to friends.
Pros and Cons of family buy to let
There are a number of benefits of operating a family buy to let:
- You can let to family members and charge them a reduced rent.
- You can live in the property if you need to.
- It may solve a problem for your family.
However, it’s important to be mindful of the potential downsides too:
- Affordability assessments are likely to be stricter than ordinary buy to let.
- You will need a bigger deposit.
- You will need to pay a 3% stamp duty surcharge for investors as well as other tax considerations.
Is there an alternative to family buy to let?
Whether or not there is an alternative will depend on your circumstances and who you need to rent to. If the relative in question is not considered close by the lender, or they will only occupy less than 40% of the property, you may still be able to use an ordinary buy-to-let loan.
Similarly, if your plan is to provide a roof over your child’s head while they are away at university you could explore ways of helping them buy the property rather than you buying it and letting it to them. This could include student or buy for uni mortgages, where your financial support could help them take their first step on the property ladder.
This could be more tax effective too – sparing parents the 3% stamp duty surcharge levied to investors purchasing second homes. This is because while your name may be on the mortgage and you would have responsibility for repayments, it would not be on the title deeds of the property.
Image source: Getty Images
Rachel Lacey is freelance journalist with 20 years experience. She specialises in personal finance and retirement planning and is passionate about simplifying money matters for all. Read more