We regularly hear about the activities of the buy-to-let market in the news, but one thing we almost never hear mentioned is the rules surrounding letting a home to family members.
Is this allowed or do the terms of a buy-to-let mortgage forbid a home being let to a family member?
With help from a recent Guardian ‘Ask the experts’ Q&A
on the matter, here at reallymoving.com we’ve taken a closer look…
Can you let a home to a close family member?
In the scenario raised in the Guardian, ‘person A’ had been approved for a buy-to-let mortgage for a property that they had no intention of living in, but it transpired that the person’s brother was willing to live in the home. The brother would pay rent, albeit at a reduced rate.
While family members were not allowed to be tenants under the terms and conditions of the mortgage - as is the case with most buy-to-let mortgages - the buy-to-let owner wondered what the consequences would be if they went against the terms of the mortgage and allowed the brother to live there regardless?
Well, in cases like these, you would be breaching the terms of your buy-to-let mortgage by renting the property to a close relative – and as a consequence your lender would be well within its rights to demand full repayment of the loan.
The principal reason for most buy-to-let lenders not allowing people to let to close relatives – which covers parents, siblings, grandchildren, grandparents and a spouse or civil partner – is because the Financial Conduct Authority (FCA) would have to step in for situations like these to regulate the sale of and advice on the mortgage.
This necessitates a more exhaustive assessment of affordability than that required for normal FCA-regulated residential mortgages and therefore requires more work on the part of the lender. With this in mind, most lenders only provide standard, unregulated buy-to-let mortgages to make the process simpler.
What happens if you don’t inform your lender about plans to let to family?
The consequences of not telling your lender that a close relative is also going to be your tenant could be severe. You would, in effect, be committing mortgage fraud, which could lead to a request for you to repay your mortgage in full – a considerable financial outlay that very few people would be able to afford at short notice.
Even if you have sought permission and your lender has allowed you to let to a family member, they may not be too pleased if the arrangement is on a ‘mates/family rates’ basis, where the rent is not at or close to market value.
If the rent doesn’t cover 125%-145% of the monthly mortgage payment – which is likely to have been one of the requirements when your mortgage application was approved – this could cause you issues with repaying your mortgage in the appropriate way.
Certain lenders do provide options
Fear not, while the majority of lenders do not offer mortgages allowing you to let to close relatives, some do.
So, if you’re desperate to let to a family member, it is achievable if you look in the right places. Niche Advice, a mortgage broker which offers expert advice on buy-to-let mortgages, says there are lenders offering regulated or ‘family’ buy-to-let mortgages, even if these are very rare.
Consumer website Which? says those who offer this kind of mortgage include Melton Mowbray, Furness, Mansfield and Virgin Money building societies. Mansfield, for example, is unique in expecting rental income to cover the mortgage repayment by only 100% - that said, its other affordability requirements still need to be met as well.
In February 2018, it introduced its specialist Family Buy to Let mortgage product
to the marketplace, aimed specifically at landlords looking to let to a close family member.
Parents who want to rent out a home to their children while they’re at university may be particularly interested in this kind of product. The appeal of being able to provide their offspring with affordable, good quality rental accommodation while they study and also making a property investment at the same time is likely to be strong for some.
If you want to let to family but aren’t with a lender who offers this type of mortgage, or one which isn’t willing to be flexible on this matter, you have may have to switch lenders to completely avoid the risk of being requested to pay back your mortgage in full, all in one go.
What about extended family?
While siblings, parents, grandparents, grandchildren and spouses or civil partners all count as close family, cousins, uncles, aunts, nieces and nephews don’t. So, if you wanted to let your property to these relations (or other extended family), there would be no issue as you wouldn’t be in breach of the terms and conditions of your mortgage.
Even if you let to family, the same rules apply
If you do let to family, it’s important to remember that it doesn’t act as an informal, casual arrangement – at least not in the eyes of the law. You still have obligations as a landlord, as well as tax and stamp duty costs to consider.
Remember that all properties let privately must adhere to 29 rules and regulations listed under the Housing Health and Safety Rating System
, which means they need to be warm, damp-free and free from leaks, while all the electrics and gas must also be safe. In the latter case, an annual gas safety check needs to be carried out and a certificate needs to be issued by a Gas Safe-registered professional.
In addition, you’ll need to provide an Energy Performance Certificate to showcase the property’s energy efficiency rating and carry out repairs or improvements to the property as and when they are necessary.
You may think that being related to the tenants of the home absolves you of your responsibilities as a landlord, but the opposite is the case and you’ll still need to take your obligations as a landlord seriously even in a scenario where you’re letting to someone you already know well.