Bath Building Society launches Rent a Room Mortgages

According to ARLA *, a first time buyer will spend £64,000 on rent before buying a home. Our Rent a Room Mortgages could change all that! It allows an individual applicant to borrow more by renting out a room and using the rent towards the mortgage payment.

What if you find your ideal home, but your income isn’t quite enough to get the mortgage you need? Well, if the property has a spare bedroom, our Rent a Room Mortgage might be just the answer.  If you rent out a spare bedroom, we will take into account the rental when deciding whether we can offer you the mortgage you need.

This example explains how it works:

An applicant earns £26,000pa and wants to buy a two bedroom property for £200,000.  They have a 20% deposit, so need a loan of £160,000.  They have approached a few lenders, but they are unwilling to lend this amount based on the £26,000pa income.  The applicant has a friend who is looking for somewhere to live, and is interested in renting the second bedroom; they do not want to buy a property together as they do not want the long-term commitment.  The friend is happy to pay £400 per month to rent the spare bedroom.  The applicant speaks with one of our Advisers who calculates that, with a Rent a Room mortgage, the rent would cover about £58,500 of the loan, leaving just £101,500 to be covered by the other income.

Dick Jenkins, Chief Executive of Bath Building Society, said:
“Increasingly people are starting to realise that rent is more expensive than having a mortgage in the current climate. Many young people are happy with sharing their home with a friend and here we have created an opportunity to use the rent of a friend sharing the property to contribute to the affordability of the mortgage. Better still, some can use this arrangement to qualify for tax relief is just one of many inventive ways that Bath Building Society is supporting first time buyers in what is still a very difficult time for them to get onto the property ladder.”

Some important notes

•The example above is based on a single person with no children and no other debt, and assumes a 25 year repayment mortgage.  The actual figures will depend on the individual circumstances.

•Rental income from only one tenant will be taken into account and the expected rental will be based on an independent assessment.

•Minimum income of £20,000pa (excluding the rental income), employed or self-employed.

•Up to 50% of the loan amount can be covered by the rental income from letting a room in the property. The balance of the loan must be covered by income.

•The amount being covered by the rent must be no more than 4 x the borrower’s income.

•The property must be fit for purpose – for example, it must have at least two bedrooms and be suitable for occupancy immediately on completion of the mortgage.

• There needs to be a formal agreement with the tenant.

•We recommend that the borrower take tax advice.

•Maximum Loan to Value is up to 85% or up to 95% with collateral.

*Source: ARLA cost of renting – November 2015.