Family Mortgage - the Secret Buy to Let Loans

Finding an affordable home and making ends meet is tough for families as the cost of living, energy bills, rents and mortgage rates soar. Chancellor of the Exchequer Rishi Sunak has warned that household finances are likely to worsen before the economy gets a grip on raging inflation which is predicted to hit 7 per cent or more by April 2022. 

The cost of living crisis has led to many landlords scratching around for ways to help family and friends survive the worst of the financial onslaught but come up against strict ‘no family’ rules imposed by lenders. 

The path is well-worn - a landlord has a home to rent, and a close family are looking for somewhere to live, but mortgage rules mean the landlord either breaks the terms of the loan contract or turns away relatives in need. 

But landlords can rent to relatives without breaching their buy to let loan terms with a little-known family mortgage - providing they understand the tax and financial pitfalls.

Family mortgage v buy to let borrowing.

Buy to let mortgages come in two types - the widely used unregulated and the less common regulated loans, also called a family mortgage. If you are a buy to let landlord with mortgages against investment property, they are likely unregulated loans. So, what’s the difference between regulated and unregulated borrowing? 

The first step is to confirm that the relative you want to offer a home to is a ‘close’ relationship. Close family members include parents, grandparents, children, brothers or sisters. However, under-regulated mortgage lending criteria, aunts, uncles, cousins, and other extended family members are not covered. 

Unregulated buy to let lending is the most popular, accounting for almost all private rented home mortgages. Digging into the legal definitions reveals unregulated buy-to-let lending has two essential conditions:

• The borrower or their close family cannot live in the mortgaged home
• At least 40 per cent of the property must be used or intended for use as a privately rented home

Regulated lending switches these conditions:

• The borrower or close family can live in the mortgaged property
• No more than 40 per cent of the property must be used or intended for use as a privately rented home

Likely scenarios are shared houses in multiple occupation landlords renting a room to a relative. For example, one bedroom in a four-bed house could be set aside for a student child while the others are let to unrelated tenants. 

If the relative wanted to use more than 40 per cent of a home purchased with an unregulated loan, the lender would probably demand that a landlord switch to a regulated mortgage. 

The same applies if a landlord decides to move into one of the rental properties they own. Another difference between the two mortgages is how lenders work out affordability. 

Affordability for an unregulated buy to let loan is based on the annual rental income generated by the property. Regulated loans are based on the applicant’s finances, like a standard residential home loan.

Family mortgage lenders and rates

The good news for landlords shopping for a family mortgage is that most lenders will offer a deal. However, you may need more of a deposit than when taking out a buy to let loan and could find the lender will only agree to a repayment mortgage rather than an interest-only loan. 

Barclays, Natwest, Virgin Money, Melton Mowbray Building Society, Loughborough Building Society and Furness Building Society accept family buy-to-let mortgage applications.

Uncommercial lets explained

Family mortgages come with some significant tax consequences for landlords. If close relatives live in a home bought with a regulated buy to let loan, HM Revenue & Customs (HMRC) could consider them uncommercial lets if the letting is at discounted terms or free. 

An uncommercial let is tax neutral, which means the running costs are considered equal to the rent, so there is no profit or loss. Therefore, uncommercial lets are not included in self-assessment tax filings. In simple terms, this means landlords cannot claim any expenses for the mortgage, repairs or other day-to-day bills. If the costs are greater than the annual rent, any excess is written-off rather than carried forward to future years.

Family mortgage tax consequences

Writing off property business expenses is not the only tax consequence of an uncommercial let, and stamp duty is the first tax hurdle. Because a home let to the family is additional property for stamp duty purposes. Buying the house comes with a surcharge - which is calculated as 5 per cent of the value of a property valued between £125,000 and £250,000 or 8 per cent for one worth between £125,001 and £925,000. 

As the Office for National Statistics values an average home at £271,000, that’s a stamp duty bill of £11,680 Even if a landlord makes no profit from the rent, they still have the privilege of paying capital gains tax (CGT) on any gain in value when they sell or gift the property. The CGT bill sits with the property owners, not the relatives who have lived in the home.

Family mortgages - the secret buy to let loans FAQ.

Is it illegal for landlords to live in a buy-to-let?

No, it’s not against the law but may breach the lender’s terms and conditions. If you fancy moving into a buy to let or want to help a close relative with somewhere to live, then switch from an unregulated to a regulated loan before moving.

How does a lender know if owners move into a buy to let?

A few months after completing the mortgage, the lender will carry out council tax and electoral roll searches and other inquiries to confirm who is living in the home.

Where can I find out more about the tax and family mortgages?

HMRC publishes detailed information about uncommercial lets online in a Property Income Manual.

Do regulated loan rules apply if I have no mortgage?

No. Family mortgage rules only apply to rental properties or second homes with loans secured against them. If your property is mortgage-free, you can rent to whomever you wish – however, the tax rules still apply to uncommercial lets.

Should I offer a tenancy agreement to the family renting my property?

It’s not strictly necessary to offer the family a tenancy agreement, but it’s a good idea to do so. An agreement clarifies who is responsible for what while they live in your home.