Q My wife and I would like to buy a second home to live in while renting out our current property. My sister is in dire straits and desperately needs somewhere safe and secure to live with her son. Would it be possible for us to release some of the money tied up in our current home to use as a deposit on a new one? We have about £60,000 of equity at the moment and my partner and I have secure jobs. I would also like to swap the mortgage on our first property to a buy-to-let mortgage. I understand that we would have to charge my sister the market rate of rent. Is any of this possible? We would very much like to help my sister.
A Yes, it is possible but what you can’t do is convert your residential mortgage to a standard buy-to-let mortgage in this case. Instead, you have to take out a “regulated” buy-to-let mortgage, which is also known as a family mortgage. According to Pete Mugleston, a mortgage adviser at onlinemortgageadvisor.co.uk: “This is a specialist mortgage that allows a borrower to rent out the entirety of their property – or more than 40% – to a close relative.” Close family member means a child, sibling, parent or grandparent but not cousins, second cousins or aunts and uncles.
Only a handful of lenders offer regulated buy-to-let mortgages and Mugleston says their requirements tend to be stricter. It may surprise you to learn that you would not have to charge your sister the market rate of rent as “lenders are aware of the possibility that families may not charge one another as much in rent and could be more inclined to let missed payments slide”, Mugleston adds. Rather, lenders tend to require a deposit of more than 25% (as is typical with standard buy-to-let mortgages) and also base the amount they are prepared to lend you on your personal income rather than potential rental income.
Before you can apply for this kind of mortgage, you have to have a particular close family member in mind – which clearly you do – and that family member has to agree to the arrangement. If it turns out that your sister doesn’t want to be helped in this way, there’s not much you can do. But even if she does, whether it’s a real possibility depends on the state of the rest of your finances.
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