• Home
  • >
  • Blogs
  • >
  • Unlocking Opportunities: Navigating the World of Family Buy-to-Let Mortgages

Unlocking Opportunities: Navigating the World of Family Buy-to-Let Mortgages

Published by Dikshya Bhatta
Published Date: April 15, 2024
Categories: Buy to Let

Buy-to-Let mortgages in the UK are tailored to assist individuals in investing in and owning property through a structured debt plan. With a Buy-to-Let mortgage, borrowers can secure a property with a portion of the purchase price as a deposit, while the majority of the purchase price is financed by the bank. This accessibility makes it an appealing option, enabling individuals to become property owners even with minimal savings.

While this scheme offers a pathway to potentially fulfil the dream of owning a house in the UK, it's important to note that interest payments come into play. For residential property purchases, borrowers are required to pay both interest and capital monthly. Consequently, lenders typically require assurance of a stable annual income to ensure repayment of the financed amount.

However, when purchasing a property for rental purposes, lenders typically assess the potential rental income. This raises the question: Can one buy a property and rent it out to a family member? Well, the answer is not straightforward. Rental income from family members may not always be consistent, and in some cases, landlords may choose not to charge rent to immediate family members. Throughout this article, we will delve into the intricacies of renting out a property to family members and explore the family Buy-to-Let mortgage scheme.

What is a “Family Buy-to-Let Mortgage”?

What is a family buy-to-let mortgage?

As the name suggests, it is a scheme specifically designed for those borrowers who want to buy a property and rent it out to their immediate family members.

If the family member occupies less than 40% of the property, a standard Buy-to-Let mortgage can be used however in case of the family member utilising the property in a higher ratio or fully, use of family Buy-to-Let mortgage is a must.

This loan is also referred to as a regulated Buy-to-Let mortgage because it requires stringent regulation and monitoring. Family Buy-to-Let mortgages are considered risky for finance providers due to the potential for landlords not to charge rent to family members or to charge lower rents. This can pose challenges for mortgage repayments. To mitigate these risks, lenders often prefer borrowers with stable income streams beyond rental income to ensure consistent mortgage repayments.

Who counts as a Family Member for Mortgage Purpose in Family
Buy-to-Let Property?

In a Family Buy-to-Let Mortgage scenario, the strictness of the loan agreement varies on a case-by-case basis. Lenders typically prefer a regulated Buy-to-Let mortgage when renting out to immediate family members like children, siblings, parents, and grandchildren. Relying solely on rental income for repayment can be perceived as risky, especially if there's uncertainty regarding actual rental income. In such cases, lenders seek assurance of steady income beyond rental earnings to ensure timely mortgage repayment.

Who counts as a family member for family buy-to-let mortgage?

Moreover, if the borrower intends to rent out the property to cousins or other relatives at minimal rental rates, relying solely on rental income may not suffice. It's essential to inform lenders of such scenarios in advance, allowing them to tailor the loan agreement accordingly and offer a regulated Buy-to-Let mortgage.

Want to know more about this, read our article on, "Can I Live in My Buy-to-Let Property?"

How is “Family Buy-to-Let” Mortgage different from standard Buy-to-Let Mortgage?

The family Buy-to-Let mortgage is tailored for families aiming to purchase a property for renting to a family member, such as a child or parent. In contrast, the standard Buy-to-Let mortgage targets individuals seeking to invest in properties solely for rental purposes.

Regulated by the Financial Conduct Authority (FCA), the family Buy-to-Let mortgage is also known as a regulated Buy-to-Let mortgage, ensuring compliance with regulatory standards. Conversely, most of the standard Buy-to-Let mortgage is not subject to such regulation.

When considering eligibility for a family Buy-to-Let mortgage, emphasis is placed on the investor's personal income and expenditure, recognising the potential inconsistency or minimal nature of rental income. In contrast, eligibility for a standard Buy-to-Let mortgage primarily hinges on the rental income generated by the property.

Tax Considerations when getting a Family Buy-to-Let Mortgage

When you purchase through a family Buy-to-Let mortgage, it will more than likely be a second property purchase, which attracts a 3% Stamp Duty Surcharge. In addition, Capital Gains Tax needs to be paid when selling off the property.

Tax Considerations

Further, you might be taxed more if you are a higher taxpayer. This is because under the new system which has been implemented after 2017, landlords are paying tax on their full rental income and receiving a tax credit for a portion of their mortgage interest repayments i.e., 20%.

Pros and Cons of Family Buy-to-Let Mortgage

The Pros of Family Buy-to-Let are as follows:

  • Letting to family members at reduced rent: The owner has the flexibility to rent out the property to family members at a reduced rate, providing them with affordable housing and generating rental income to the owner.
  • Living in the property if necessary: In times of need, such as financial difficulties or changes in personal circumstances, the owner has the option to live in the property themselves.

The Cons of the Family Buy-to-Let Mortgage are as follows:

  • Stricter Affordability Assessments: Lenders may impose stricter affordability assessments for family Buy-to-Let mortgages compared to traditional Buy-to-Let mortgages. This could make it more challenging to qualify for a mortgage, as lenders may require evidence of higher income or stricter financial criteria.
  • Larger Deposit Requirement: Family Buy-to-Let mortgages often require a larger deposit compared to standard Buy-to-Let mortgages. This means that the owner needs to have more upfront capital available to secure the property, which could pose a financial barrier for some investors.

Conclusion

A family Buy-to-Let mortgage can be very handy in certain situations, such as when you want to provide a close family member with living space at affordable rates. This provides flexibility however, it is essential to carefully navigate the potential challenges associated with family Buy-to-Let mortgages, such as stricter affordability assessments and larger deposit requirements. These factors may impact eligibility and financial planning, requiring landlords to weigh the pros and cons before proceeding with this investment strategy.

Need Expert Advice on Family Buy-to-Let Property?

Contact us today for efficient and hassle-free assistance.

Dikshya Bhatta
Our Complete Guides
Related Posts

Trust UK Property Accountants to Optimise Returns and Minimise Hassles!

Reach Out to Us Today and Let's Shape
Your Success Together!

Success message!
Warning message!
Error message!