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 circ*mstance, what type of mortgage do you get? Are there different lending criteria? Do you need a higher credit score? Below, we break down what a family buy to let mortgage is, and how you can get one.
What is a family buy to let mortgage (regulated 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, or a regulated buy to let mortgage, caters to people looking to rent out 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. As a landlord to a member of your family, there is a higher chance you’ll be flexible about when rent comes in, 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, with more thorough underwriting and higher expectations for your income as a landlord. What this means is your mortgage application depends on your personal income, and your lender may want evidence that you can afford the repayments without relying on the rental income of your family member/tenant.
Can I rent property to a relative?
In a nutshell, yes. 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 point of application, to ensure you won’t breach your mortgage terms, which could result in the lender calling in the loan early. Therefore, it is best to seek expert advice from your mortgage broker to see the most suitable mortgage rates available to you based on your situation.
Am I eligible for a family buy to let mortgage?
Eligibility for a family buy to let mortgage will depend on the lender, so it may be best to contact a mortgage broker first to find out 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 circ*mstances for wanting this type of mortgage. 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 are helping them get started and 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 residential mortgage, there is a monthly amount of the loan as well as interest to be paid back. Consequently, it is generally slightly more expensive for landlords to rent to family.
Also, it’s important to be aware of the tax implications of 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. Depending on your circ*mstances, there may be other tax charges, so you should seek professional tax advice before deciding on a mortgage product.
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 inexperienced 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.
Alternatively, 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 for expert advice or use a mortgage calculator to see the best 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 let the property to your family members at a reduced rent price as the lender requires you to prove that you could pay the loan without the rental income
- It can resolve familial financial issues
Cons:
- There can be higher taxes such as the stamp duty surcharge
- They can be harder to source due to more thorough affordability assessments than standard buy to let mortgages
- A larger deposit is required
Like with any mortgage, it can be tricky and stressful to find the right information you need for your personal circ*mstance, so we advise you to source expert advice to find the best price for you and your needs. We’d love to hear from you and see how we can help. To speak to one of our expert brokers, call us on 0345 345 6788 or submit an enquiry here.
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This blog was updated on the 7th June 2023.
7th June 2023
As someone deeply involved in real estate investment and mortgage dynamics, I can attest to the complexity of the housing market, especially concerning specialized areas like family buy-to-let mortgages. Understanding these mortgages requires a grasp of regulatory criteria, lending nuances, and the intricate financial dynamics involved.
A family buy-to-let mortgage, also known as a regulated buy-to-let mortgage, differs significantly from standard buy-to-let mortgages. The core distinction lies in the relationship between the landlord and tenant—the former being a family member. These mortgages are regulated due to the perceived higher risk by lenders, stemming from potential flexibility in rent payments and charges compared to market standards. Consequently, lending criteria are more stringent, necessitating thorough underwriting and stronger emphasis on the landlord's income.
Eligibility for this mortgage type hinges on various factors, including the nature of the family relationship, the extent of the family member's occupancy within the property, and the landlord's capacity to cover mortgage payments without relying solely on rental income.
When it comes to borrowing on a family buy-to-let mortgage, lenders often assess affordability based on the landlord's income rather than anticipated rental returns. This leads to a requirement for a larger minimum deposit of 25% and a higher likelihood of being offered capital and interest repayment terms instead of interest-only options, increasing the overall cost for the landlord.
Tax implications, including the possibility of a 3% stamp duty surcharge on the property purchase, and complexities in claiming tax relief as a business expense due to the familial tenant, further complicate these mortgages.
While a family buy-to-let mortgage offers the advantage of potentially supporting family members financially, it's essential to consider the associated higher taxes, increased difficulty in sourcing due to thorough assessments, and the larger deposit required.
This type of mortgage can be a beneficial option under specific circ*mstances, like aiding a student family member or helping them get started in their professional life. However, it's equally crucial to weigh the potential financial burdens and familial dynamics that could arise from becoming a landlord to a family member.
In certain scenarios, exploring alternatives like gifted deposits or specialized mortgages, such as student or buy-for-uni mortgages, might be more suitable and cost-effective while avoiding the complexities tied to family buy-to-let mortgages.
Ultimately, seeking expert advice, preferably from mortgage brokers well-versed in these specialized mortgages, is crucial in navigating the intricacies and finding the most appropriate mortgage product tailored to individual circ*mstances.
For a more comprehensive understanding and tailored guidance, consulting with an expert mortgage advisor or utilizing mortgage calculators to explore various rates based on specific situations is highly recommended.
