The cost of buying property in the UK is ever rising, so getting some help to cover the mortgage makes sense to many - and if you have a spare room that’s not being used, then why not consider having another paying adult in the home to share the cost of the mortgage?
Having a lodger isn’t as simple as just advertising the space and watching the money come rolling in, however, and there may well be implications for your mortgage.
Can I have lodgers with a mortgage?
It is worth checking your mortgage terms to make sure that having a lodger is not outside the conditions of your loan, but it is rare that a lender has an issue with you having a lodger.
Bear in mind, your mortgage provider is not the only thing you need to think about. Having a lodger means that there may be changes needed with your insurance and gaining an income has some tax implications. Thankfully, the government rent a room scheme covers the latter quite nicely - discussed later in this article.
Can I apply for a mortgage with lodger income?
The extension of being ‘allowed’ a lodger as part of your mortgage, is using the lodger as extra income when first making a mortgage application - improving your affordability and maybe opening the door to better deals and larger loans.
The difference between a lodger and a tenant
It is very important for your mortgage that you do not confuse a lodger with a tenant. A lodger lives in the property with you, whereas a tenant rents the property in their own right. While the former is often done on a casual lease, the latter requires a tenancy agreement and other legal obligations.
Additionally, letting out the entire property rather than renting out a room while you live alongside will definitely require a change from the standard residential mortgage.
If you are planning on investing in a property for letting purposes, then you will need to get a buy-to-let mortgage. Often these are interest-only mortgages that are used to invest in a second property, and are quite different from a first-property residential mortgage.
The mortgage deals you get with one will not be relevant to the other, with different rates, conditions and loan-to-value.
If you are considering a buy-to-let mortgage then please speak to our specialist team here at The Mortgage Hut who will be happy to help you understand the ins and outs of becoming a landlord!
Changing the terms of your mortgage
If you already have a residential mortgage in place and need to change the terms of the mortgage to allow you the right to have a rental tenant, then that can be done, either by changing your mortgage from residential to buy-to-let, or through an official consent to let on your current mortgage.
Our team at The Mortgage Hut can help - just call!
Using lodger income to improve your mortgage deals
At The Mortgage Hut, we work with specialist lenders who are able to look at your income as a complete picture and make a decision regarding your affordability or mortgage size based on that. Rather than relying on a single figure from your salary, they can include additional income - such as that from a lodger - to make sure they have a more accurate and positive idea of your finances.
However, given the short term nature of lodging and the lack of consistent contracts in most cases, it could be hard to convince even the most flexible lender that your supplement from a lodger presents a strong regular component to your income.
Obviously, a lot depends on your situation. For example, your lodger may be an adult family member who plans to live with you for a few years and is able to show that, or you may have a clear contract with your lodger that is acceptable to the mortgage provider. In these circumstances, some specialist lenders will be willing to consider it as part of your overall income.
It is worth noting, however, that the closer you come to a ‘permanent’ lodger, the more likely the mortgage lender is to want to make sure the terms of your mortgage contract include that person. In some cases, they may expect the lodger to be a full party to the mortgage as a joint owner. Discuss your specific situation with your mortgage advisor at The Mortgage Hut for some personalised advice.
Paying tax - understanding the rent a room scheme
The government rent a room scheme allows you to make up to £7,500 per year from a lodger without having to pay tax on the income, or even make a declaration to HMRC!
For anyone charging £144 or less per week for a room in their house, this makes the legal part of having a lodger a relaxed affair.
If, however, your rental income exceeds the rent a room scheme threshold, then you will need to file the money as self-employed income via a tax return, and it may be worth getting the advice of an accountant registered in England or Wales for a full understanding of your position.
Flats and other leasehold properties
If your property is not freehold, then it may be that the leasehold agreement prevents you subletting part of your home in this way. While your mortgage provider may be completely happy for you to have the financial help of a lodger, the leasehold may say differently.
Make sure you check the terms of your lease if you are in a flat or similar property before you agree to having a lodger.
Buildings insurance is there to protect your investment in the case of a fire or other disaster that harms the property, and part of the agreement you have with the mortgage provider will state that you have insurance in place throughout the 25 years or so of your mortgage term.
Some insurers may consider a lodger outside of the policy and by taking in an adult to live in your spare room, you unwittingly invalidate the insurance. It is important that you understand the terms and conditions of your insurance and contact them directly if you have any worries that there could be an issue.
Tenants and your credit score
Living with someone doesn’t mean that they affect your credit rating, despite many myths that suggest they do. If your lodger has bad credit, it won’t affect your mortgage or your ability to remortgage in the future.
However, bear in mind that if you are relying on your income from your lodger to pay the mortgage, bills or other financial responsibilities that are in your name, then you may find yourself in the position where you have to cover for your lodger if they are unable to maintain their rent commitment to you.
You should always be prepared for a period during which you are let down with your lodger and must ensure that your mortgage repayments are covered even if the lodger cannot provide your due. Remember, it’s not just your credit history and future credit applications that are at risk - failure to make repayments on your mortgage can lead to the repossession of your home.
The best mortgage products with The Mortgage Hut
At The Mortgage Hut we work with over 90 specialised lenders across the UK, all authorised and regulated by the financial conduct authority. Our expert advisors are here to help you get the best deals to suit your personal situation and can help you with all aspects of your mortgage - including discussing any lodger situation and making sure it is properly accounted for.
For the best mortgage offers in the market today, contact The Mortgage Hut! Use our simple online contact form to have one of our team get back to you, or simply pick up the phone today!