In this brief guide, we are going to discuss the rent a room mortgage.

Rent a room mortgage

A rent a room mortgage is a mortgage offered to residential homeowners who choose to rent a room to a third party within their residence. Some mortgage lenders now cater to these kinds of borrowers and lenders such as the Bath building society now have a product labelled as the rent a room mortgage.

The rent a room mortgage essentially takes into account your income and mortgage affordability as it usually would but the rent a room mortgage also takes into account any income you may be generating from the room you are renting.

The rent a room mortgage came about primarily due to the rent a room scheme

The rent a room mortgage

The rent a room mortgage is provided by the Bath building society. We will discuss the features of the rent a room mortgage below.

The rent a room mortgage allows people who find a home they want to buy but can’t fully afford the monthly mortgage repayments due to their income to rent out part of their home to a third party. Bath building society will take the income which will be generated from that rental into consideration when deciding whether to offer the prospective borrower a mortgage.

An example of the rent a room mortgage

A prospective mortgage borrower earns £56,000 annually and wants to buy a £400,000 house with 3 bedrooms. They have a £80,000 mortgage deposit and need a mortgage for £320,000. 

Due to how the mortgage multiples work, most mortgage lenders will only lend around 4 times your current income. With an income of £56,000 most mortgage lenders will only lend about £224,000 but the prospective borrower needs a mortgage of £320,000.

If you can find someone who wants to rent a bedroom from the home  for about £800 a month then Bath building society could determine that this rent could cover  about £96,000 of the mortgage whilst the rest will be covered by the borrowers income.

The rent a room mortgage from the Bath building society has 4 main products which differ mainly on their rate, structure and the Loan to value offered. They are:

“3 year Residential 2.45% Discount RDD051

5.1% APRC

2.99% variable for 3 years followed by Standard Variable Rate (SVR), currently 5.44%

Purchase up to 80% Loan To Value (LTV).

Minimum deposit of 20% required.

Overpayments up to 20% of the capital balance as at 1st January are allowed in each calendar year without penalty.

This mortgage is Portable.

Mortgage fees

Product Fee 0.4% of  advance (Minimum £599)

Administration Fee £125

Valuation Fee (scale)

Completion Fee £75.

Early repayment charges:

3 % in years 1 & 2, 2% in year 3, plus a Closing Administration Fee (currently £100).

3 year Residential 2.25% Discount RDD061

5.2% APRC

3.19% variable for 3 years followed by Standard Variable Rate (SVR), currently 5.44%

Purchase up to 85% Loan To Value (LTV).

Minimum deposit of 15% required.

Overpayments up to 20% of the capital balance as at 1st January are allowed in each calendar year without penalty.

This mortgage is Portable.

Mortgage fees

Product Fee 0.4% of  advance (Minimum £599)

Administration Fee £125

Valuation Fee (scale)

Completion Fee £75.

Early repayment charges

3 % in years 1 & 2, 2% in year 3, plus a Closing Administration Fee (currently £100)

5 year Residential 3.29% Fixed RDF008

4.9% APRC

3.29% fixed for 5 years followed by Standard Variable Rate (SVR), currently 5.44%

Purchase up to 80% Loan To Value (LTV).

Minimum deposit of 20% required. 

Overpayments up to 20% of the capital balance as at 1st January are allowed in each calendar year without penalty.

This mortgage is Portable.

Mortgage fees

Product Fee 0.4% of  advance (Minimum £599)

Administration Fee £125

Valuation Fee (scale)

Completion Fee £75.

Early repayment charges

3 % in years 1, 2, 3 & 4, 2% in year 5, plus a Closing Administration Fee (currently £100).

5 year Residential 3.5% Fixed RDF009

5.0% APRC

3.5% fixed for 5 years followed by Standard VariableRate (SVR), currently 5.44%

Purchase up to 85% Loan To Value (LTV).

Minimum deposit of 15% required.

Overpayments up to 20% of the capital balance as at 1st January are allowed in each calendar year without penalty.

This mortgage is Portable.

Mortgage fees

Product Fee 0.4% of  advance (Minimum £599)

Administration Fee £125

Valuation Fee (scale)

Completion Fee £75.

Early repayment charges

3 % in years 1, 2, 3 & 4, 2% in year 5, plus a Closing Administration Fee (currently £100).”

Key points about the rent a room mortgage

•Single applicants only, without financial dependants.

•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 after deductions (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 other 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.

• In certain areas of Greater London and also within the M25, the maximum loan to value considerable is 75%.

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

•We recommend that the borrower take tax advice.

How to contact the Bath building society?

You can contact the bath building society about the rent a room mortgage by calling 01225 475737 or sending an email to mortgages@bibs.co.uk

Why is there a need for the “rent a room mortgage”?

Typically mortgage lenders make it very clear in your mortgage agreement that you are not allowed to rent a room out as if you do this you may become ineligible for the mortgage they have given you and be more eligible for a rent a room mortgage or likely a buy to let mortgage.

What is the rent a room scheme?

The rent a room scheme is a scheme which came about to help solve the affordable housing crisis.

The rent a room scheme works by allowing residential homeowners to earn a tax relief of up to £7,500 when they rent a furnished part of their home out.

If you are considering getting a rent a room mortgage then you should speak to a mortgage broker who may be able to assist you in getting a mortgage.

Using a mortgage broker

You may want to consider using an independent mortgage broker to get a rent a room mortgage.

Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases. This could be over 11,000 mortgage products. This may have some advantages than going directly to a mortgage lender.

A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you.

After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle. This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your remortgage is indeed a possibility before you make a full mortgage application. Once you have found a home you want to buy or are satisfied with the mortgage offer for your remortgage then the mortgage broker will then look to get you a mortgage offer.

This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month if there are any limits such as early repayment fees, or annual overpayment limits.

If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer. 

Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it, they will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.

In this brief guide, we discussed the rent a room mortgage. If you have any questions or comments please let us know below.

If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.

You can also contact the debt charity “Step Change” if you are in debt and need help.