Mortgage with Lodger: Key Considerations and Benefits

Getting a mortgage with Lodger

Have you ever thought about taking in a lodger? A spare room in your home can benefit both you and your tenant. It’s a financial challenge buying your own home these days – and the steadily rising cost of living looks set to make that still more of a struggle. Like many others, you might welcome the chance of earning a little extra cash by letting out a spare room in your home and getting some valuable help in meeting your monthly mortgage repayments. tax-free under the established Rent a Room Scheme. (Please note, this information is correct as of May 2022, but is liable to change).

As far as any lodger is concerned, of course, the offer is likely to be thoroughly appreciated. Affordable rented accommodation of any kind is in short supply and the chance to move into a ready-made home to share with you and your family may go down very well indeed.

In fact, the government too recognises this small way in which you might be helping to ease the wider housing crisis by offering accommodation to a lodger. By way of an incentive, HM Revenue & Customs (HMRC) lets you earn up to £7,500 a year completely

Bear in mind, however, that there are frequently implications for mortgages with lodger income – so you will want to confirm whether your lender is at ease with your effectively managing a lodger mortgage. Let’s look at the potential issues.

What is a mortgage with Lodger?

If you’re a homeowner struggling to make mortgage payments, taking in a lodger could be a solution worth considering. A mortgage with a lodger, also known as a rent-a-room mortgage, allows you to rent out a spare room in your home to generate additional income. This can help you cover your mortgage payments and reduce your financial stress. Additionally, under the UK’s Rent-a-Room Scheme, you can earn up to £7,500 per year tax-free from renting out a furnished room in your home. However, it’s important to understand the legal and financial implications of having a lodger, as well as the potential risks involved. Before entering into a rent-a-room mortgage, it’s important to do your research and seek advice from a qualified mortgage professional to ensure that you fully understand the terms and conditions of the mortgage, as well as the tax and legal obligations of being a landlord.

How does it work?

Wondering how to take advantage of the UK’s Rent-a-Room Scheme tax exemption? If you earn less than £7,500 per year from renting a furnished room, you are exempt from paying tax. If you earn more, complete a tax return and opt into the scheme for a tax-free allowance. Indicate participation on your tax return or report rental income and expenses on the property pages. Understanding tax implications and complying with UK tax laws is crucial to avoid penalties.

Can I have lodgers with a mortgage?

Is a lodger the same as a rental tenant?

A lodger is not the same as a rental tenant. A lodger rents a spare room in your home and uses shared facilities. You may need a rent-a-room or lodger mortgage for lodgers. A tenant occupies separate accommodation you are not living in. Tenants have assured shorthold tenancies, usually for at least six months, with more legislative control.

Where you have a tenant – and you are not living at the same property – you may typically need a buy to let mortgage.

Why is it more difficult to get a mortgage with lodger income?

Sometimes, mortgages with lodger income can present a challenge.

Some lenders will regard your decision to take in a lodger as increasing the risks associated with the mortgage advance. There may be an element of uncertainty or doubt as to how long your lodger will stay or whether they can be relied upon to pay you the rent when it falls due.

In short, the rental income you enjoy may be unpredictable.

For that reason, some lenders will refuse to take into consideration any anticipated income from a lodger or lodgers when assessing the affordability of any mortgage for which you have applied.

What is a Rent a Room mortgage?

On the other hand, other mortgage lenders will consider your anticipated income from lodgers – and recognise that any such income will help you to meet your monthly mortgage repayments.

This is aptly described as a Rent a Room mortgage – and might prove especially helpful to those first-time buyers who may need a little boost to their income to meet their monthly outgoing when they get that all-important first step on the housing ladder.

Can I get a mortgage if my only income is from lodgers?

Even if a lender includes the bonusIncome received as a bonus, which may affect a borrower's ab... of an income from lodgers when calculating the affordability of a mortgage, you will find it practically impossible to secure a mortgage if your only source of income is from such a lodger.

In other words, if you are unemployed and have no other source of income than rent from a lodger, typically you will be unable to secure a mortgage.

Next Steps

By taking in a lodger, you stand to earn a valuable source of additional income – at the same time as you are playing your part in helping to ease the housing crisis by accommodating someone in a spare room in your home. The value of doing so is recognised by the government’s Rent a Room Scheme.

But, as we have discussed, there are potential issues and implications for your mortgage. At NeedingAdvice.co.uk we can help find you a suitable rent a room mortgage / lodger mortgage.

FAQs- Mortgage with Lodger

What are lodger mortgages?

Lodger mortgages are mortgages in which the mortgage lender considers your existing rental income from lodger to increase your mortgage term and declarable income.  This means that you can borrow more money against your home than would otherwise be possible.

The benefit of this approach is that it helps to reduce the risk of default. If you were to stop paying your mortgage, the lender could recover the full amount of the loan from the lodger rather than having to go through the hassle of repossessing your property.

The downside of this approach is that you must continue to pay the rent to the landlord during the period that the lodger remains in the residence. If you are interested in getting a lodger mortgage, you can contact a mortgage broker who can help you with the best possible mortgage deals.

Is it more difficult to get a mortgage with lodger income?

Lenders may be wary of lending to people living in properties owned by someone else. This could mean that the borrower doesn’t pay rent and defaultsMissed payments on credit accounts, which can affect a borro... on the loan. In addition, if the person rents out rooms, they may not be considered reliable tenants. If the lender refuses to accept the income from the lodgers, then the borrower may be unable to afford the mortgage repayments. However, some lenders may still provide loans to lodgers. It is better to contact a mortgage advisor before starting your mortgage application process.

How do I declare lodger income for a mortgage application?

If you want to apply for a mortgage with lodger status, you should make sure that the mortgage lender knows about your lodger arrangement. You should also ensure that you keep accurate records of how much rent you receive each month.

You should include the lodger’s name, address, occupation and date of arrival on your tenancy agreement. Make sure that you sign the agreement in front of the lodger.

You should also inform the lender of any changes to the terms of the lease or the number of occupants in the house. These details need to be included in your mortgage application form.

What are the eligibility criteria for a mortgage with lodger income?

Like other mortgages, getting a mortgage with lodger usually depends on your mortgage affordability assessment set by the mortgage lender. Every lender has different criteria set for such mortgages and you may need to get mortgage advice from a financial advisor before starting your mortgage application.