Investing in a property for any family member to reside in might sound just like a great idea, but will it really make sense financially?
If your son or daughter is moving to university or you’re helping an elderly relative downsize, you might have considered purchasing a property yourself and renting it out for them – perhaps for any little under you can get on the open market.
Family buy-to-let could possibly be the right option for some people, but there’s a web of mortgage and taxation complexities you’ll need to navigate first, as we explain below.
Buy-to-let mortgage implications of renting property to family members
If you’re seeking to rent a house out to a family member, you won’t be capable of getting a standard buy-to-let mortgage.
This is usually because most people operating a family buy-to-let won’t charge their relative the full market rate to reside in the property.
This makes the investment more dangerous for that borrower (especially if they have a small deposit) and, consequently, for the lender setting up the money.
Regulated buy-to-let
When you purchase a standard buy-to-let property, your mortgage won’t be regulated by the Financial Conduct Association (FCA).
With family buy-to-let, however,lenders will often assess the application in the same way they would if you were trying to get an ordinary residential mortgage, rather than a buy-to-let mortgage.
This means you’ll instead be applying for what’s commonly known as a ‘regulated’ buy-to-let mortgage.
Depending around the lender, you may need a bigger deposit, and perhaps you’ll only be allowed to remove the mortgage on a repayment basis rather than an interest-only one.
As you may be letting for below market price, some lenders will need you to prove you’ll have adequate income to pay for the mortgage without taking the rent payments into consideration.
Virgin Money, Melton Mowbray Building Society and Furness Building Society all accept family buy-to-let applications, and you'll also find that some building societies will consider applications on a case-by-case basis.
If you’re considering a regulated buy-to-let mortgage, it can help to speak to a mortgage adviser, who definitely are capable of finding the right lender and deal for the circumstances.
Family buy-to-let mortgages
Last year, Mansfield Building Society made headlinesby launching the Family Buy To allow mortgage, which fits differently from most other products.
The deal allows landlords to let a house to a close family member with an interest cover ratio of just 100%, meaning the rental income only needs to cover the full mortgage payments, without requiring more on top.
This product also allows landlords to use their earnings to cover the shortfall when they let the property for below market value.
A year on, Mansfield still offers two-year and three-year discount mortgages included in its Family Buy To allow offering.
Family buy-to-let tax issues
One of the most popular barriers to investing in family buy-to-let are the tax implications.
The heftiest blow is available in the type of stamp duty. Assuming you already own your personal property, you’ll have to pay a3% stamp duty surcharge when buying neglect the property.
This can lead to a substantial outlay. For example, a buy-to-let property costing 275,000 would be subject to a 12,000 stamp duty bill.
Other tax implications
You’ll also need to consider the long-term capital gainsandinheritance tax implications of buy-to-let, and if the government’s tapering of mortgage interest tax reliefwill affect you.
Finally, it may seem difficult to claim for those expenses on the property let to some family member, as you could find it difficult to prove it’s being let ‘wholly for business purposes’ when the rent you’re receiving is really a lot below market rates.
Investing in a property for the child at university
If you’re considering buying a property for the child to live in at university, you might be enticed by stories of impressive yields and long-term capital growth on student property.
In truth, student property investment could be a risky business and, if you’re thinking of letting for your child and their fellow students, it’s even more complicated.
That’s because while letting a property to some group of unrelated students will help you meet your mortgage repayments (and maybe enjoy a good rental yield), there's a series of obligations you’ll need to stick to:
Free advice for moms and dads from Which? University
If your son or daughter is moving to college, you can aquire a insightful free advice from Which? Universityon everything from funding to course choices.
As a starting point, browse the parent, guardian and carer guide to university, that was created in partnership with Ucas.
Your obligations as a landlord
Investing in buy-to-let means taking on the required as being a landlord, regardless of who you’re letting the property to.
If you’re letting for your own child, however, the emotional stakes is going to be much higher, especially if you’re placing a financial burden on yourself in so doing.
With this in your mind, you need to formalise the problem whenever possible, including by creating atenancy agreement.
You'll likewise need suitable insurance, will need to continue up to now with gas safety checks and, if a deposit pays, you'll need to place it in a deposit protection scheme.
