Purchasing a buy to let property is an excellent way of investing in the housing market. But sometimes, the motive for buying a residential property to let out is not financial gain, but instead a way of supporting family members.
In this circumstance, what type of mortgage can you get? Are there different lending criteria? Do I need a higher credit score? In this article, we outline what a family buy to let mortgage is, and how you can get one.
What is a family buy to let mortgage?
A standard buy to let mortgage is needed when purchasing a residential property that you intend to rent out to strangers. However, if your tenant is a family member, you will need a different type of mortgage. A family buy to let mortgage, also known as a regulated BTL mortgage, is designed for people looking to rent their property to a family member.
Family buy to let mortgages are regulated because mortgage lenders consider landlords renting to relatives a higher risk than unrelated tenants. Renting to family means there is a higher chance you’ll be flexible about when the rent is paid, and what you charge compared to the market average.
As a result, lending criteria are more complex and therefore regulated by the Financial Conduct Authority, meaning more thorough underwriting and higher expectations for your income as a landlord. This means your mortgage application will depend on your personal income, and your lender may want evidence that you can afford the repayments without relying on the rental income.
Can I rent my property to a relative?
In a nutshell, yes you can. Family buy to let mortgages allow you to rent your properties to your relatives; however, they have tighter regulations from lenders. If a lender deems that you are looking to rent to your close family, i.e., a parent, child, grandchild, sibling, you will more than likely need a regulated buy to let mortgage.
On the other hand, if you are renting out to extended family, you might be able to apply for a standard buy to let mortgage. Some lenders will consider cousins, aunties and uncles as more distant relatives, and therefore will lend on a normal buy to let mortgage instead.
It’s important you fully disclose this information at the start of your mortgage application, to ensure you won’t breach your mortgage terms. Therefore, it is best to seek expert advice from a mortgage broker to see the most suitable mortgage rates available to you based on your situation.
Will a lender accept me for a family buy to let mortgage?
Suitability for a family buy to let mortgage will depend on the lender, but a mortgage broker will be able to advise what your options are. In general, you should be eligible if you rent out a residential property to a close family member and can pay off the mortgage payments without the rental income.
There are many different circumstances for wanting a buy to let mortgage to rent to a family member. For one, your child might be a university student. By purchasing a buy to let for your child whilst they are studying, or even starting out at work, you will help to ease the financial pressures they have.
One thing to be aware of is that you may not need a family buy to let mortgage if the family member occupies under 40% of the property. For example, if you buy an HMO (House of Multiple Occupancy) for your child and other students or young professionals, a regular buy to let lender may offer a mortgage.
How much can I borrow on a family buy to let mortgage?
Unlike standard buy to let mortgages, lenders base affordability for family buy to let mortgages on your income rather than rent. The increased risk means you will need a larger minimum deposit of 25%.
Furthermore, unlike many buy to let mortgages that offer interest-only repayment terms (to help landlords keep monthly costs down), regulated buy to let mortgages are more likely to only offer capital and interest repayments terms. The difference between these two options is that interest-only loans allow landlords the full loan term to save for the total loan amount to be paid back, usually taking equity from other properties to do so.
However, for a standard repayment option, just like on a homebuyer mortgage, there is a monthly amount of the loan plus interest to be paid back. Consequently, it is generally slightly more expensive for landlords to rent to family.
There are also tax implications to be aware of when purchasing a family buy to let. As the property would count as a second property, you may have to pay the 3% stamp duty surcharge on the purchase. There may also be other tax charges, depending on your circumstances, so you should seek professional tax advice before deciding on a mortgage product.
Additionally, there may also be difficulties on claiming tax relief as a business expense due to your family member being a tenant, so it is important to keep this all in mind before committing to the purchase.
Being a Landlord to your family
It is important to reflect on your responsibilities as a landlord, and whether this may cause tensions within your family. Whilst this may seem a less critical issue, it can become stressful and challenging to maintain the property to a high standard when there are familial issues at the centre of the property.
If you are looking to help out your family financially, but are an first-time landlord or do not want the pressure that comes with it, it may be a better idea to consider your other options.
For example, a gifted deposit is a really common way to help your family get onto the property ladder themselves. A gifted deposit is typically given to a homebuyer to help them buy a property and, unlike loans, there is an understanding that this sum of money does not need repaying. A gifted deposit plus a fixed mortgage rate could be a great way to help someone budget for their first-time home.
If someone in your family is a student, your mortgage broker may be able to source a student or buy-for-uni mortgage on which you can be a guarantor. These are a niche type of mortgage and complicated to secure, so speak an expert mortgage advisor for assistance.
These options would help save money, as both exclude you from the higher taxes and other charges that may come with this mortgage. Again, to find the best option for you, please reach out to one of our expert advice or use our buy to let mortgage calculator to see the current best mortgage rate for your situation.
What are the pros and cons of a family buy to let mortgage?
To summarise, then, some of the pros and cons of a family buy to let mortgage include:
Pros:
- If necessary, you can also live in the property whilst renting it out
- You can rent the property to family members at a lower rental price. However, you must prove to the lender that you can afford the mortgage repayments without the rental income.
- It can resolve familial financial issues
Cons:
- There can be higher taxes such as the stamp duty surcharge. (Use our calculator to work our how much you might have to pay.)
- They can be harder to source due to more thorough affordability assessments than standard buy to let mortgages
- You may need a larger deposit.
As with any mortgage, it can be tricky and stressful to find the right information you need. So, we recommend you speak to one of our mortgage advisers to see how we can help. You can call us on 0345 345 6788 or submit an enquiry here.
Reviewed and updated on the 22nd April 2024.
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