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.

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Sarah is MoneyWeek's investment editor. She graduated from the University of Southampton with a BA in English and History, before going on to complete a graduate diploma in law at the College of Law in Guildford. She joined MoneyWeek in 2014 and writes on funds, personal finance, pensions and property.