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5 Feb 2018

Buy-to-let for parents: can you rent a property to your kids?

New mortgage deal offers low interest cover ratio

A new mortgage deal offers parents the option of letting a property to their children for below market value - but is putting the 'rent' into parent a good financial move?

Mansfield Building Society has launched a new mortgage deal that allows landlords to rent a property out to a close family member, without the need to meet strict lending criteria that would otherwise apply to buy-to-let.

Here, we take a look at how you can keep buy-to-let in the family, and the effect it could have on your finances.

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Mansfield mortgage offers ICR cut

Normally, to get finance on an investment property, landlords must prove the property has an interest cover ratio (ICR) of between 125% and 145% - meaning the rent is at least 25% to 45% higher than the monthly mortgage payments.

The new Family Buy To Let mortgage from Mansfield Building Society allows landlords to let a property to a close family member with an interest cover ratio (ICR) of 100%, so that rent just has to cover payments. Landlords can instead use their earnings to make up the ICR shortfall.

Mansfield says 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'.

Do other lenders offer similar deals?

While the new deal from Mansfield might seem like it fills a gap in the market, some other lenders offer solutions that focus primarily on your income, taking the focus away from ICRs.

David Blake of Which? Mortgage Advisers says: 'There are a few lenders that consider this type of situation, with Virgin being the most well known'.

But, unlike the Mansfield offer, these mortgages will be considered residential, rather than regulated buy-to-let products.

Mr Blake says: '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.'

Why is family buy-to-let attractive?

There are many reasons why you might want to let a property to a family member.

One of the most common is if your child is moving to university and you want to ensure they live in quality accommodation they can afford without having a regular income.

Alternatively, if you're downsizing to a smaller home, you might want to keep a property in the family that you would otherwise look to sell.

Your obligations as a landlord

Letting to a close family member throws up its own risks. You might overlook some due diligence you'd undertake when letting to a stranger, and the emotional stakes are higher if your child fails to pay the rent.

Although you might be unlikely to run a credit check on your own children, it's important to carefully consider their financial situation and whether they will be able to meet their payments.

It's also advisable to draw up a tenancy agreementto set out the terms of the let and as proof of their right to live in the property.

Your obligations as a landlord remain, too - regardless of who you're letting the property to. You'll need appropriate insurance, will have to keep up to date with gas safety checks and, if a deposit is paid, you'll need to place it in a deposit protection scheme.

Tax implications of letting below market rate

If you're letting your property to a family member for below market rate, you'll need to consider the tax implications of doing so.

For example, you might not be able to claim all expenses on the property as you could struggle to justify it being 'wholly for business purposes'. In some cases, there could also be inheritance tax obligations.

With this in mind, we would strongly recommend speaking to a financial adviser before rushing in.

Stamp duty implications of buy-to-let

If you're considering buying a property to rent to your child, rather than using an existing home from your property portfolio, you'll need to factor in the 3% stamp duty surcharge for people buying investment properties and second homes.

This expense can make a big dent in your budget, with an investment property worth £275,000 costing you £12,000 in stamp duty. By comparison, a first-time buyer would pay no stamp duty at all to purchase the same home.

This means it's worth also considering your child's longer-term options away from a family buy-to-let.

With stamp duty abolished for most first-time buyers and bonuses being offered through Lifetime Isas, helping them save for a deposit be a better move in the long run?