Avoid these gimmicky mortgages

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.

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.

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.