The mortgage that is aimed at getting first-time buyers on to the property ladder more safely.
The product takes the government’s lodger scheme, which allows people to earn up to £4,250 per year in rent tax free, and adds this to a borrower’s income, allowing them to take a higher mortgage if they expect income from letting a room.
There are two mortgage types available which allow a borrower to rent a room – a two-year fixed rate of 5.99% until 30/06/09 (which reverts to Bank Rate +0.99% for term 6.5% APR) and a two-year tracker which tracks at 0.50% above Bank Rate, giving a pay rate of 5.75% (also reverting to 0.99% above Bank Rate, 6.5% APR).
Both products are also available with no Higher Lending Charges up to 95% loan-to-value (LTV).
Katie Tucker, product specialist at John Charcol, commented: “This is a product that allows people to benefit from a practise that goes on every day already. Many people take a lodger in to help pay the mortgage and bills, so offering a formalised solution goes that one step further. This means some can afford to join the property ladder and others can afford two bedrooms when previously they may have been restricted to one.”
Key Features
- £4,250 can be added to gross income for first room and then £3,188 (75%) can be added for a second room. The maximum amount is therefore £7,438 which is added to your salary
- Minimum salary of £25,000 required.
- 4.25 single income and 3.25 joint income available.
- Can overpay up to 10% per annum Early Repayment Charge (ERC) free at the beginning of each year. This is useful if a borrower wishes to overpay any excess rent to reduce their mortgage.
- Low arrangement fees of £599 and £699, which can be added to the loan.
- Max loan at 95% LTV is £250,000; at 90% LTV £350,00; and at 85% LTV £500,000.
For example, a single person who earns £25,000 per annum could borrow £106,250 (based on a 4.25 income multiple). On this basis, a repayment mortgage over 25 years with an initial rate of 5.99% would have monthly payments of £692. However, adding £4,250 available from rent-a-room they could borrow an extra £18,062 which gives maximum borrowings of £124,312. Monthly payments would be £809. The mortgage is £117 more expensive, but the additional tax-free income from renting out the room would be over £350 a month.
Tucker continued: “This product provides a structured means of borrowing allowing more people to achieve their home-ownership dreams without over-extending themselves.
“Adding just a few extra thousand pounds to the amount that can be borrowed can make a big difference. For first-time buyers it could be the opportunity to buy in a nicer area, get an extra bedroom or even a garden. For remortgagers it could be the difference between keeping your property or not, if the friend or partner that you bought with moves on. Of course, many of us start with one-bedroom property and have to move on should we need more rooms. With the cost of moving increasing, this concept means that you can start with two bedrooms and you will not have to up sticks so quickly should you need another room.”
