An article in today's Guardian caught my eye, there are so many of us who would like to help their relatives, but (understandably) are unsure about whose advice to follow. It reads:-
Q My mum is 52 and lives on her own on a low income in the north of England. I rent and work in London and am fortunate enough to be on a fairly good income. My mum, however, is struggling, so two years ago I started covering her mortgage payments. She has approximately £90,000 equity in her home and an outstanding mortgage of £50,000. She earns only £18,000 a year.
Given that I am already covering the mortgage payments I am considering buying the house and letting her live in it rent free. The benefit being that she can then release the equity and pay off her credit cards and enjoy some of her hard-earned money.
Should we buy as joint tenants or tenants in common?
I live in a rented flat and don’t currently have a mortgage, so this would be my first mortgage. I have no immediate plans to buy a place for myself, although may consider buying in or around London with my partner in a few years.
I would really love to remove the financial burden from my mum, knowing she could then have a nest egg to enjoy.
I have been speaking to a financial adviser who has advised me that I cannot purchase mum’s house and let her live in it as I won’t be living there myself, and that I can’t get a buy-to-let mortgage as she is a close relative. But otherwise he hasn’t been very helpful and I’m not sure whether he is giving me sound advice.
I have been doing my own research but information is very hard to understand and I read conflicting things.
A Your financial adviser is right to say you can’t take out a residential mortgage for a property in which you won’t be living. He is also right – up to a point – that you can’t take out a conventional buy-to-let mortgage because you would be letting to a close relative.
But according to independent mortgage adviser Niche Advice, if you were already a homeowner it might be possible to take out what is referred to as a regulated or consumer buy-to-let mortgage. These allow applications for such mortgages to be assessed according to the same strict affordability rules set by the Financial Conduct Authority (FCA) for residential mortgages if the property is to be let to a close relative.
The FCA defines “close relative” as a spouse, civil partner, mother, father, brother, sister, child, grandparent or grandchild. (So in theory you could take out a standard buy-to-let mortgage if you planned to let to a cousin, uncle, aunt, nephew or niece.)
Should I renegotiate my offer price after survey points to problems?
With standard buy-to-let mortgages taken out purely for business purposes, which are not regulated by the FCA, applications can be assessed by looking at rental income alone. Typically, if you have a sufficiently large deposit and the rent can cover the mortgage repayment by 125% your application will be accepted.
According to Niche Advice, however, the “key driver” of the two lenders that offer regulated buy-to-let mortgage is applicants’ affordability rather than rental income, and they are likely to insist the mortgage is repayment rather than interest-only, in line with the rules for residential mortgages.
In addition, to be eligible for a regulated buy-to-let mortgage Niche Advice says the key criteria are:
• a minimum income of £25,000 excluding state pension and other benefits
• a deposit of 40%, all of which must come from you
• you must be an owner-occupier rather than renting yourself
• an ability to cover the buy-to-let mortgage out of earned income
• rental coverage of 125% of the mortgage payment.
Given these criteria, it seems unlikely that a regulated buy-to-let mortgage is an option for
you to buy your mother’s home. There may be a small silver lining in that cloud in that, if you
were able to take out a mortgage to buy your mother’s home and something happened to you that
meant you were unable to keep up repayments on it, you mother could be made homeless if the
property had to be sold.
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