A house in the UK is often seen as the symbol of independence, freedom, and stability. It’s a great way to put down roots in an area you love while also providing your family with a safe, secure, and comfortable place to live. But what if you wanted to buy a house in the UK and rent it to your child?
You can buy a house in the UK and rent it to your child. This ensures your child has a secure and stable place to live, while the rental income can help cover mortgage costs. Being your child’s landlord means you are responsible for any compliance, insurance, and legal requirements that may apply.
Renting a house for your child can also help them build up their credit record, as long as they make the payments on time. In this article, I’ll cover the different ways you can buy a house and rent it to your child, as well as any pitfalls you should be aware of.
Family Buy-To-Let Mortgage in the UK
As a parent, I know how difficult it can be to find a place for your child to call home. With the high cost of renting in the UK, buying might seem like a distant dream, but with a family buy-to-let (BTL) mortgage, you can buy a house and rent it to your child.
A family buy-to-let mortgage is a type of mortgage that allows you to purchase a property that can be rented to family members. It is a great option for parents wanting to provide their children with secure and affordable accommodation.
You can buy one or more properties, providing housing for multiple children. The lender will conduct an affordability assessment when taking out a family BTL mortgage. This means that they will take your income into account to ensure that you can afford the mortgage payments in case your child(ren) fails to pay their rent or they vacate the property.
Some other requirements a lender might have include:
- An individual applicant and not a company
- A minimum of 25% deposit (the more you can put down, the better the rate and terms you can expect to receive)
- A minimum income requirement
- A satisfactory credit score
- Proof of rental income from the property.
A family buy-to-let mortgage works similarly to an ordinary BTL mortgage. The lender will assess the family’s financial circumstances and decide how much they can lend. The mortgage will then be secured against the property, just like any other buy-to-let loan.
The main difference with a family buy-to-let mortgage is that the borrower’s child will live in the property as their primary residence. The rent paid by the tenant (the child) will usually cover a significant portion of the mortgage payments. You will not make any profit but rather cover the costs of the mortgage because if I let my child rent it, I will not charge the market rent.
This helps reduce the borrower’s cost and makes it easier for them to keep up with their repayments. This loan is much riskier than a standard buy-to-let mortgage as the potential tenant (the child) is not credit-checked or asked to provide any proof of income.
The lender’s decision to grant the loan will be based solely on the parent or grandparent’s ability to keep up with the repayments. You have to be realistic about your finances and ensure that you can keep up with the mortgage payments in case your child cannot pay the rent.
How Does the Family Buy-To-Let Mortgage Work?
A family buy-to-let mortgage works mostly the same way as any other BTL mortgage. The main difference here is that the application process is more difficult, with more stringent criteria and stricter lenders.
The process typically starts with a financial assessment, where the lender will look at your income and other financial details to determine whether you can afford the loan. Then, you’ll need to provide evidence of a suitable property investment plan and landlord experience.
The lender is also likely to check your credit background. Once all this is done, they will offer you a mortgage tailored to your circumstances.
This includes a higher loan-to-value ratio and more flexible repayment options. And, of course, you’ll need to ensure that the property is suitable for rental purposes, which might require some improvements or maintenance.
When the mortgage is approved, you can buy the property in your name and rent it to your child. This can be a great way to help them get on the property ladder or to give them a head start financially.
Remember that this type of mortgage comes with some risks. If you ever decide to sell the property, you’ll need to ensure that your child is legally allowed to remain in the property until their lease is up or the property is sold.
You will also still be liable for the mortgage, regardless of whether you receive rent on time from your child or not.
Who Can Qualify for a Family Buy-To-Let Mortgage?
To qualify for a family buy-to-let mortgage, you must be 25 or over but not yet retired, own a UK property that is not currently being rented out to family members, and have sufficient income to cover the mortgage repayments.
When assessing your application, the lender will look over your earnings and expenses. This allows them to determine if you can afford the mortgage. Generally, lenders will require that you have an income of at least £25,000 per year and be able to prove your rental income will cover the mortgage payments.
You need a good credit history and a deposit of at least 25% of the property’s value. You should also be able to provide evidence of your financial circumstances, such as bank statements and payslips.
If you are self-employed or have an irregular income, you may need to provide additional proof of your financial situation.
You’ll also need to provide proof that you have adequate landlord insurance coverage and the correct permits and licenses.
Be aware of any tax requirements that come along with renting out a property to your family. In the UK, you may be liable for income tax on any rental income you receive.
You should also be aware of any stamp duty or capital gains tax you may have to pay when purchasing the property.
Lenders have different criteria and requirements for family buy-to-let mortgages, so you should assess your options and choose the best fit for you.
What Are the Benefits of a Family Buy-To-Let Mortgage?
There’s no denying that buying a house in the UK can be an expensive endeavour. But there are benefits to taking out a family buy-to-let mortgage that can make getting a house for your child a good choice. Some of the benefits include:
Personal Use
You can keep the property in your name and have access to it anytime you want. This allows you to use it as a holiday home or permanent residence. The potential to move in with your child and enjoy the property makes it a much more attractive option.
It’s also a good fallback plan if you’re ever in dire straits. Still, this is a conversation you should have with your child beforehand.
Family Bonding
It is an excellent way of bringing family together. Not only do you get to spend time with your children, but you also get the chance to learn more about them and keep an eye on their lives.
It also provides a great opportunity for you to teach them about being responsible tenants and landlords.
Lower Cost To Family
While renting out to your child, you can rent at a reduced rate. This can be especially beneficial if your child is a student or in the lower income bracket.
You will help them by giving them a place to stay at an affordable rate. It also allows them to save money and use it for other needs, such as education or starting a business.
Solve a Family Problem
Maybe your kids are grown up and are yet to move out of your house. You may want some privacy for yourself and want to give your kids a place of their own. By buying a rental property and renting it to your children, you can solve this problem.
Drawbacks of a Family Buy-To-Let Mortgage
Some potential drawbacks of a family buy-to-let mortgage need to be addressed, as they could take away from the benefit of having your child live in the property.
Tax Implications
A stamp duty surcharge of 3% applies to family buy-to-let mortgages in the UK from April 2021, which makes it more expensive for parents to buy a house and rent it out to their children. In addition, if the rental income is high enough to be subject to taxation, then the tax implications of renting a property to family members must also be considered.
If you rent out a property to your child, the income would be considered additional and subject to taxation. This can complicate matters, as various tax rules must be followed.
For instance, landlords in the UK must register with HMRC and declare rental income when filing tax returns. Capital gains tax may also apply when the property is sold, depending on the individual’s level of income and whether or not it has been held for more than three years.
Stricter Lending Criteria and More Rigorous Affordability Assessments
With family buy-to-let mortgages, lenders tend to apply stricter criteria when assessing applications. This means they’ll look much more closely at your income and expenditure to ensure that you can afford the repayments.
This could mean extended delays in arranging a loan and even providing additional documentation to secure a mortgage.
A Larger Deposit
The deposit for a family buy-to-let mortgage is usually larger than for a standard buy-to-let. This can make it more difficult to secure the loan, especially if your credit rating is less than perfect.
You may need to save up a larger deposit or take out a higher-interest loan to cover the additional cost.
Tips for Making the Most of a Family Buy-To-Let Mortgage
After weighing up the pros and cons of a family buy-to-let mortgage, you may decide it’s still the best option for you and your family. Here are a few tips to ensure you make the most of it:
Work Out the Finances
Renting a property for your child may be cheaper than getting them an independent tenancy, but it still has costs that could be higher than a regular mortgage. Work out how much rent you’ll need to charge to cover the mortgage payments, tax, and other costs. You should also factor in any potential capital gains tax payable when the property is sold.
Keep Documentation Up-To-Date
Ensure all documents relating to the tenancy agreement and mortgage are up-to-date. This includes any proof of income, as well as current landlord references. Any changes in the tenancy agreement should be documented, and copies kept on file.
Consult a Professional
It’s good to speak with a professional, such as a lawyer or financial advisor, before committing to anything. They will be able to provide advice on the legal ramifications of renting a property to your child and help ensure you’re not falling foul of any relevant regulations.
Set Ground Rules
Ensure that you and your child are clear on the ground rules. These could include ensuring rent is paid on time, the property is kept clean and tidy, and any repairs are carried out in a reasonable timeframe. It’s a good idea to set these expectations in writing, with both parties signing the agreement.
Final Thoughts
While a family buy-to-let mortgage can be an attractive proposition, there are still some important considerations to take into account. However, if you’re aware of the potential risks and benefits, it could be a great way to help your child get their foot on the property ladder. The right approach and advice can ensure a win-win situation for both of you.
Sources
- Home Owners Alliance: Rent to Buy: How the government can help you buy a home
- Home Owners Alliance: Can Rental Property Be Used As Collateral in the UK?
- GOV.UK: Work out your rental income when you let property
- Home Owners Alliance: BTL Properties for Students: A good idea?
- Home Owners Alliance: Stamp Duty for Buy-to-Let
- GOV.UK: Renting out your property
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