We regularly hear about the activities of the buy-to-let market in the news, but we almost never hear about 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 2019 Guardian ‘Ask the experts’ Q&A on the matter, 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 the person’s brother was willing to live in the home. The brother would pay rent 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 anyway.
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 main 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) has to regulate the sale of and the advice on the mortgage in these cases.
This means a more in-depth assessment of affordability than that required for normal FCA-regulated residential mortgages and so requires more work from 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.
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. There are lenders that offer 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, Mansfield 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 children 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 asked to pay back your mortgage in full.
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 with regular buy-to-let mortgages, as you wouldn’t be in breach of the terms and conditions of said mortgage.
Even if you let to family, the same rules apply
If you do want to let property 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.