For those sending children off to university, or have family members in need of somewhere to live, it is natural to consider investing in a property and renting it to them far cheaper than they would otherwise find on the rental market. However, when you take out a buy-to-let mortgage you are required to ensure that your rental income will not only cover the cost of the monthly mortgage payments, but will actually cover anywhere between 125% and 145% of the mortgage.
These hefty amounts are off-putting when it comes to letting to family members and investors can either walk away, or put their house on the traditional rental market instead.
Mansfield Building Society has recognised this problem and has come up with a new mortgage product designed to specifically address this.
Their Family Buy To Let mortgage means that the rent charged by a landlord only needs to cover the mortgage costs with the extra Interest Cover Ratios (ICR) margins covered by the investors own earnings. This new type of mortgage product is something that is now being replicated by other lenders, however, many are treated as residential mortgages rather than buy to let.
Whilst this new type of mortgage covers all sorts of situations, it is most likely to be used for children who are moving away from home to study at university. Many parents are concerned about the living conditions that their offspring will be subjected to, and so investing in a property for them to live in gives them a certain peace of mind.
By renting to your own child, you also have the comfort of knowing who is in your property and how it is being looked after, rather than being subjected to the uncertainty of letting your investment to someone you do not know.
Even though you may be letting to a family member, you should still have a tenancy agreement drawn up to cover the terms of the let, and you will need to ensure that proper insurance, gas safety checks and deposit protection is in place.
By letting to your student child, you also know the period of time that this will be necessary, making it possible to let the property to the wider rental market when it is no longer needed.
It is important to remember that investing in a property is not just a good deed whereby a family member benefits from only paying the cost of the mortgage and not the over-inflated rental prices. An investor has a lot of other responsibilities and implications including formal landlord obligations, stamp duty and taxes, so make sure you have done your homework before offering this option to a loved one.
Mark Burns is the managing director of property investment firm, Hopwood House.
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