Families seeking to invest in a rental property and let it to their children or close family members at less than market value often find that a buy-to-let mortgage is not an option.
However, today’s marketplace has presented a new opportunity with the introduction of a specialist Family Buy to Let mortgage product.
Borrowers seeking to purchase a property and rent it to family members are often dissuaded by the excessive rental payments they would have to charge, in order to meet lenders’ strict interest cover ratios (ICR). All buy-to-let lenders require that the rental income covers the mortgage payment, plus a margin to cover other costs. Borrowers have to prove that the rental income would cover 125%, and sometimes as much as 145% of the mortgage, often making it an unattractive and sometimes impossible proposition to then let it to family members.
However, Mansfield Building Society has developed a new buy-to-let product aimed specifically at landlords that want to let to a close family member. Their new Family Buy to Let mortgage allows landlords to rent a property out to a family member with an ICR of 100% – that means the rent just has to cover the mortgage repayments, and they can use their earnings to make up the ICR shortfall.
The new product allows landlords to “choose a property that is appropriate for their family needs without having to charge excessive rental payments purely to meet strict ICR calculations”, according to the Building Society, which seems to have filled a growing gap in the mortgage market.
An opportunity for parents with children heading to university
This means, in particular, that parents could purchase and then let a property to their children for below market value. This is an appealing option for families whose children are going to university and want to ensure they are living in affordable, good quality housing, and make a property investment at the same time. It also gives those downsizing the option to keep a property in the family that might otherwise be sold.
The Mansfield Building Society mortgage isn’t the only option on the table. There are other lenders offering solutions based on income rather than ICRs. However, they often treat these mortgages as residential, rather than as regulated buy-to-let.
David Blake of Which? Mortgage Advisers said: “There are a few lenders that consider this type of situation, with Virgin being the most well-known… Often with these cases, lenders treat the application like a residential property, as they understand the tenant will be paying a reduced rent. They therefore like applicants to have income of their own to sustain the mortgage.”
Remember landlord obligations, tax and stamp duty implications all still apply
A Family Buy to Let mortgage is an interesting and attractive option to consider for many families, especially where family members paying market rate rent is impossible. Remember, however, that letting to a relative is not an informal agreement and you will still have obligations as a landlord, plus tax and stamp duty implications to consider.
