Know Your Rights: Renting to Family and Friends
While renting to family and friends may seem like the easiest thing to do, you still need to know your rights
It might seem like the perfect situation – you have a property that you want to let out, and a friend or family member is in need of a place to call home. Instead of letting your property to a stranger you’ve never met before, you can entrust it to somebody that you already know well.
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This could well be a great solution to everyone’s problems. However, (especially) when dealing with loved ones, it’s important that everyone is on the same page about what the arrangement is and that expectations on both sides are clear from the off. Boundaries are important!
It’s also essential to make sure you’re clued up on any legal issues that could arise, such as whether your mortgage allows you to rent to loved ones, and what might happen if you go ahead and let your property to family or friends without letting your lender know first.
And you’ll need to decide how comfortable you are about asking your loved one for things like a signed tenancy agreement and security deposit – or how uncomfortable you are not asking for those assurances!
It can be wonderful to rent to family and friends, but, as with anything that mixes business and close relationships, there are plenty of things to consider before taking the plunge!
Is it legal to rent to family and friends?
There’s no law that says you can’t rent to family and friends, but, unless you own your property outright, you’ll need to make sure you’ve got the right mortgage in place and that your lender knows about your plans in advance.
Legally, you must tell your mortgage broker that you are going to rent to family or friends, and if needed convert your standard mortgage to a buy-to-let.
However, many lenders are reluctant to issue buy-to-let mortgages in this instance, due to:
- Concerns that you’ll charge family/friends lower rent which could impact your loan repayments
- Worries about difficulties in enforcing repayments if rent is missed – or an unwillingness to evict tenants that are family if rent problems persist.
- Increased work for the lender as the sale and advice for the mortgage when renting to family have to be regulated by the Financial Conduct Authority, making it less appealing for the lender than a standard unregulated mortgage
Those mortgage providers who do consider it will most likely apply stricter terms to your mortgage if they know you are going to rent to family or friends.
And unfortunately, the vast majority of standard buy-to-let mortgages agreements exclude close family members – siblings, children, parents, grandparents and spouses/civil partners – from being able to rent your property altogether.
If you’re still keen to do this, it’s worth booking a call with our mortgage advisors who will be able to answer any questions you have about this process.
What happens if I rent to close family without telling my lender?
With many mortgage lenders unwilling to provide buy-to-let mortgages for properties rented to family and friends, it could be tempting to rent to your trusted loved one surreptitiously.
But if you don’t tell your lender your plans and they find out anyway, you could be liable for mortgage fraud and be asked to pay back your mortgage in full. Niche Advice, explains that ‘If found guilty [of mortgage fraud] your credit file would be tarnished to such an extent it could affect your future job prospects and credit.’
Heavy consequences indeed for wanting to rent to Grandma Doris! However, all is not lost!
Regulated buy-to-let ‘family’ mortgages
If you are willing to go through the process of switching mortgage providers, you can apply for a regulated buy-to-let, or ‘family’ mortgage in order to rent to a close family member.
Lenders offering these kinds of loans are rare, but they do exist and our mortgage advisors, with access to so many mortgages, should be able to find you one.
Whereas a lot of providers still want rental income to cover mortgage repayments and then some – which can be harder to do if offering ‘mates rates’ to your loved one – there are lenders that allow rental income to cover the mortgage repayment by only 100%, though there are likely to be other affordability requirements to meet as well.
What else is there to consider when renting to family and friends?
So, you’ve done a lot of the hard work – you’ve made the decision to go ahead and rent to family or friends and you’ve secured the right mortgage.
But there are still things to consider before moving your new tenants into your property.
However great your relationship is to begin with, with people you know well things can easily become sticky when money is involved, and crystal-clear communication is key to avoiding any potentially awkward disagreements later on down the line.
Talking through any possible issues before you enter into the agreement fully is going to be essential to preserving your all-important personal relationships should any disagreements occur in the process of renting to a loved one.
It’s also worth remembering that though you know your loved one well, you don’t actually know what they’re like as a tenant and you may have no idea what they’re like with money. So definitely think all of this through – and agree on how you will hand arrears and damages – before you go ahead.
Should I use a tenancy agreement?
The answer to this question is a resounding, YES!
The simplest way to avoid or minimise future conflict is to draw up a tenancy agreement which both parties agree to, go through it together in detail and make sure everyone understands that it is a legally binding document.
You’ll need to decide what kind of tenancy to let your property with – whether you want to set a fixed term or a periodic tenancy – and set out when and how the rent is paid.
If everything is laid out on paper from the beginning, then disagreements later on will be less likely – and more easily resolved too.
What about deposits and checks?
Whether you ask for a deposit or not from your loved one is a personal choice. Deposits are there to protect the landlord in case the tenant damages the property in some way.
Even with the best tenant’s accidents happen, and you need to decide if you would be ok with footing the bill if your loved one caused damage during their tenancy. We, of course, suggest you do get a deposit.
Often deposits are equivalent to a month’s rent, so if you feel uncomfortable with asking for a full deposit, but you don’t feel protected without one at all, a happy medium could be utilising Deposit Replacement so both parties are happy!
There are a few other things you should sort out too:
- Avoid damage disputes. Getting an inventory check done before your loved one moves in will also help resolve any disputes about damages when they come to move out
- Get references. Reference checks are another thing to consider and although it might feel awkward to ask family or friends for information about their financial situation, consider how awkward it would be finding out later down the line that they can’t afford the rent!
- Get RGI. If you want to get Rent Guarantee Insurance, you will need to reference your tenants – this could make a potentially awkward conversation easier
Remember that you will still need to pay tax on income gained by renting to family and friends.
And if you bought your buildings or content insurance through your mortgage lender, then there might be restrictions there as well on who you can let the property to, so it’s worth double checking your documents terms and conditions in advance.
Is renting to family and friends the right decision?
There is a lot to consider when deciding whether to rent to loved ones.
- You’ll need to make sure you’ve got the right kind of mortgage in place and that your lender is on board so as to remain on the right side of the law
- You’ll also need to consider what kind of tenancy agreement to use to keep the arrangement professional
- You’ll need to come to an accord on any other issues – such as deposits and damages
So, as you can see, renting to family or friends is not the simple undertaking you might have originally hoped for, but knowing that your property is being looked after by someone you know well can provide great peace of mind.
And it is a fantastic feeling to give someone you care about a good place to call home.
So, the real question is whether it’s right for you and your loved one in particular!