Avoid these gimmicky mortgages

In another sign that the housing market is heating up again, one building society is offering a “rent-a-room mortgage”. Steer clear, says Sarah Moore.

Here's an interesting sign if you needed it that the housing market is seriously heating up again. Bath Building Society (BBS) is launching a "rent-a-room mortgage", aimed at borrowers who are buying a house with the intention of renting out a spare room. The new mortgage will consider income to be earned from a lodger (under the government's "rent a room" scheme, you can earn up to £4,250 a year £7,500 from 6 April tax free) when assessing just how much an applicant can borrow.

BBS uses this example: say someone on £26,000 a year wants to buy a house for £200,000. They have a 20% deposit, so need to borrow £160,000 normally too much on that salary. But if the buyer can find a friend who will pay £400 a month to rent a room, BBS will consider that to cover "about £58,500 of the loan, leaving just £101,500" to be covered by income. On that basis, they'll lend the £160,000. The loan only takes account of one tenant it can't be extended to a whole houseful of renters. You need a minimum income of £20,000.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The mortgage is available at a maximum loan-to-value of up to 85%, or 95% with collateral.The interest rate, meanwhile, at around 5.2% overall, is higher than the average for first-time buyers. That reflects the extra risk being takenon by the lender (which should ring alarm bells with you too).

BBS's rent-a-room mortgage is not the only "creative" option for buyers with insufficient resources. For example, the Family Building Society offers "family mortgage" products, whereby family members can help relatives get on the property ladder without actually handing over cash.This usually involves depositing money in an "offset" account so as to reduce a buyer's interest payments.

Advertisement - Article continues below

But while these mortgages might be tempting to some, we're not convinced. In each of these cases, the borrower is heavily reliant on others to pay their mortgage (hence the higher interest rates). With BBS's offering, up to half the loan can be covered by rental income, which means a big chunk of your monthly mortgage payment depends on someone else paying the rent. If your tenant moves out, you would have to find another.

A family mortgage is even worse. The guarantor family members are either locking up their cash for several years, or potentially putting their own home at risk of repossession, or both not a recipe for familial harmony. Buying a house is tricky and emotional enough as it is, without mixing friendship and family into the bargain. We'd suggest that if you need one of these "gimmick" mortgages to buy, you should reconsider your whole plan.




Living on a houseboat: the pros and cons of a floating home

Living on a houseboat sounds romantic and peaceful. But it’s not as straightforward as it looks, says Nicole Garcia Merida
14 Feb 2020
Equity release

Equity release: how to tap your house for cash

The pros and cons of releasing equity from your home compared with moving to a smaller one
10 Feb 2020
House prices

Like it or not, UK house prices appear to be rallying

The UK housing market seems to be perking up. But that may not be a good thing, says John Stepek.
29 Jan 2020
Personal finance

Act now to beat the spring remortgage rush

Many homeowners will see their bills jump in April as competitive mortgage deals expire. Find a new one now.
28 Jan 2020

Most Popular

House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020

The euro’s slide against the US dollar looks set to continue

The euro has been in a bear market against the US dollar for two years now. And on a broader scale since 2008. A decline like that is telling us somet…
19 Feb 2020
Share tips

Three overlooked stocks to buy now

Each week, a professional investor tells us where he’d put his money. This week: Joe Bauernfreund, portfolio manager at the AVI Global Trust, highligh…
17 Feb 2020

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020