If your child is a first time buyer, they might be feeling the pain of getting a foot on the property ladder. They might be paying a really high rent, or they might have moved back home to save money.
To help them out, you might be thinking about buying a home that your child can rent from you.
This approach has advantages for everyone involved, but there are plenty of financial and legal implications to consider before you push ahead. So, here’s what you need to know.
Let’s start with the positives:
If, like many families, you’re living with grown-up children who’re struggling to save enough for a deposit, getting your own home back is a big plus.
For you, a second property can also be an investment. Depending on where you buy, you might be able to make a profit selling the property when your child is ready to move on, or you could continue to make an income from renting to new tenants.
Your adult child also gets their own space. Renting from parents generally comes with more stability than from a private landlord who might decide to end the tenancy without much notice.
The chances are, you’ll also charge lower rent (or at least, you won’t inflate the price to make a profit). That said, there’s probably still a minimum amount of rent you’ll have to charge to meet the conditions of your mortgage – more on this later.
There’s also no denying that a second property is a massive purchase. This extra expense can have an impact on your finances, especially if you’ve started to think about retiring soon.
But some of the main drawbacks simply come from mixing your roles as parent and landlord, child and tenant. So, here are some questions to ask yourself before you commit:
These aren’t insurmountable problems, but it’s really important to discuss things openly. It’s also helpful to draw up a tenancy agreement. You can use an online template, so it doesn’t have to be complicated, but it means expectations are clear before anyone moves in.
Still considering your options? Here’s what to know about the financial and legal implications of becoming a landlord for your own kids.
Assuming you’re already a homeowner, the process of buying a second property to rent to your child is quite similar to any other second property purchase.
We break things down fully right here, but here’s what you absolutely need to know:
Second properties need larger deposits. Where mortgages for first homes usually need a 10% deposit, and sometimes only 5%, second homes typically need 25%.
For example, a £220,000 main property might be possible with an £11,000 deposit. To buy it as a second home, you’ll need £55,000.
As with any “buy-to-let” mortgage, there are also tax implications:
You might not want to think about it, because family is family, but all landlords have legal responsibilities.
This list of responsibilities gets even longer if your child is going to have housemates. If three or more unrelated people live in the property, the house must pass HMO (House in Multiple Occupation) regulations. These include strict fire safety rules, regular safety inspections, and a list of legal notices you have to display.
You’ll also need landlord’s insurance. And if you take a deposit, you have to keep it in a deposit holding scheme where it can’t be touched.
You can read more about the costs you can expect and the hoops you’ll need to jump through here: The real costs of being a landlord.
Whether you’d like your child to live in a second property that you already own, or you’re buying a new property for them, you’ll usually need a regulated family buy-to-let mortgage.
The Financial Conduct Authority regulates these mortgages because they recognise that renting to family is risky (at least from the mortgage lender’s point of view). You might be more willing to let the property maintenance slide or overlook missed rent payments, which means that the value of the property could go down, or you might not make your mortgage payments.
Most lenders will also expect the rent to cover 125–145% of the mortgage, no matter who you rent to.
There is a second option, which is getting a standard residential mortgage for a second property, and declaring from the beginning of the application process that the house will be in your child’s name and it is not your intention to live there.
Not all mortgage lenders offer these as options, so it’s really worth consulting a mortgage advisor or broker at an early stage. Habito can help with this.
If buying a new home for your child to rent isn’t for you, there are lots of other ways to help your kids onto the property ladder without the long-term investment of a second mortgage.
This is probably the simplest option. You can gift up to £3,000 a year, as well as carrying over unused allowance from the previous year, without running into tax implications. So, a two-parent household could give a financial gift of up to £12,000.
If this is the plan, you’ll have to sign a legal agreement saying you don’t expect to be repaid. Beyond that, the only potential complication is that the rules around this “bank of mum and dad” arrangement have been tightened in recent years.
It’s now common to pay a 10% deposit and have to prove that no more than 25% of the deposit was a gift. So, if your child is buying a £220,000 house, this means that of the £22,000 deposit, only £5,500 can be gifted from family.
This works similarly to gifting the deposit, but you’ll sign a loan agreement instead. The document will detail the repayment schedule, the interest, and who’s responsible for the payments if someone should die. It’s essential to have this in writing because the lender will consider the loan repayments while doing the affordability checks for your child’s mortgage application.
For a guarantor mortgage, you’ll agree to cover the mortgage repayments if your family member can’t. When your child is in a more stable financial position, you can revisit the paperwork and take your name off the mortgage later.
With offset mortgages, you use the money in a savings account to offset the amount of the mortgage loan that you pay interest on.
For example, if you’ve borrowed £140,000 in total, but you have £30,000 in savings, you’ll only pay interest on £110,000 of your mortgage. This means you’ll pay less total interest in the long term, and you’ll also be able to get to your savings if you need them.
While this is usually based on your child’s mortgage and savings account, there’s an option called a family offset mortgage. That’s where the savings account is in the parent’s name instead – and that can also be a good way to help.
The bottom line? There’s a lot you can do to help your child, but not every option works for every family. This is where a mortgage broker, like Habito, can help to make the process clearer. Get started here.
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Here's all you need to know about converting a residential mortgage into a buy-to-let mortgage.
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