Family buy-to-lets with a mortgage: is renting to relatives a good idea?

Letting out property to a close family member is an appealing idea, particularly for those looking to help out their children, but there are some important factors to consider first.

There are a number of situations where renting out your property to relatives may seem like the best option. Those who become “accidental landlords”, for example, might feel that having family as tenants is the easiest option, while parents with children at university or just starting out in their careers often want to offer them a helping hand by investing in a roof over their heads.

However, while this strategy works well for many, it isn’t always as straightforward as it might seem.

1. Buy-to-let mortgage options

If you’re thinking of renting out property to a relative at below market value, you might not be eligible for a standard buy-to-let mortgage. This is because most lenders require that the rental income be around 25-30% higher than your mortgage payments in order to qualify for a buy-to-let mortgage, so an alternative product may need to be used instead. It may also be necessary to prove that, if letting the property at below market value, you can cover the mortgage payments in full without the rental income.

Family buy-to-let mortgages, specifically for these situations, are available from certain lenders. Mansfield Building Society, which made headlines last year when it entered the field, offers a number of products, including a three-year fixed rate at 4.4% with 75% LTV.

The Melton Building Society also offers products specifically for family buy-to-lets, with a 3.29% standard variable rate currently available on 75% LTV, up to a maximum loan of £500,000.

2. Tenancy contract

Although it may be awkward, the advice is that there should still be a legal contract drawn up between landlord and tenant – even if they are a relative. It can rule out any future issues if things were to go wrong down the line, and ensures that both parties know where they stand and what is required of them.

Taking a deposit is also recommended, as if there is any damage to the property, it can be taken from the deposit at the end of the tenancy, at the owner’s discretion. This is particularly relevant if there are other people living there, for example friends of your children renting the property.

3. Legal requirements

The building must be properly insured, and it is still vital that things such as an up-to-date gas safety check and energy performance certificate (EPC) are in place. It must be fit for habitation, and any issues like damp, mould and leaks should be dealt with by the landlord in just the same way as if letting the property to non-relatives.

Smoke and carbon monoxide alarms must be fitted and tested, alongside other necessary fire safety regulations.

You must also pay income tax on your rental income where applicable.

While not a legal requirement, it is worth looking into landlord insurance to cover for things such as missed rental payments or damage costs – this can also be affected by who is occupying the property.

4. HMOs or student lets

Many parents want to help their kids out through university, and it can tie in well with making a property investment at the same time – particularly as rental demand in university cities will always be high. However, there are some additional factors to consider if renting to students, even your own offspring. For example, student properties tend to have a higher turnover of tenants as students often stay for 12 months at a time, and there could be more wear and tear than in a non-student rental.

If your family member (or child) also has friends living with them, it may fall under the category of a house in multiple occupation (HMO). This is where three or more unrelated people live together with shared facilities such as kitchen and toilet. In some instances, you need a licence to run an HMO, and if it is a large HMO (five or more people), you will definitely need to apply for a licence, as well as abide by the latest regulations.

Worth considering?

There are multiple benefits to renting out a property to a relative. Knowing your tenant always has the advantage of increasing the level of trust, being more assured they will pay their rent on time and take care of the place. It is also conducive to having an open relationship with the tenant, as a family member can easily contact you any time to talk through any issues, whereas a tenant you don’t know may be more hesitant.

However, as laid out above, it isn’t without its complications, and many aspects of being a landlord will remain the same regardless of who your tenant is.

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