The first mortgage to consider income received from renting a room when assessing affordability, has been launched by The MarketPlace at Bradford & Bingley (B&B).
The ‘rent-a-room’ mortgage is designed to make property purchase more affordable for first-time buyers. Home owners can earn up to £4,250 a year tax free from letting a single room in their home. But lenders have not, until now, considered this income stream when calculating income multiples.
B&B’s new deal takes this income into account, while offering a choice of a flexible two-year fixed rate loan at 4.99% or a flexible two-year discount tracker with an initial rate of 3.99%.
David Bitner, technical manager at The MarketPlace, said: ‘This product is a simple solution that recognises a very common practice by simply adding the tax-free rental income to the borrower’s own income. Many lenders are not comfortable with allowing borrowers to rent a room and it is a practice which is often done without the lender’s knowledge, so this scheme will prove a huge benefit to many people’
By including rental income, a borrower earning £15,000 could borrow an extra £13,812 by adding the tax-free £4,250 to an income multiple of 3.25, assuming a 5% deposit and repayment over 25 years. The mortgage would be £80 more expensive, but the additional income from renting the room is likely to be in excess of this amount each month. The average monthly cost of renting a room ranges from £290 in Leeds to £530 in London.
Bitner said that the scheme could effectively help more people to become property owners. ‘Often, someone who earns an average wage will really struggle to make that first step on the housing ladder. With house prices currently rising quicker than salaries this scheme may provide that extra help needed for some people to climb on the ladder,’ he said.