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As interest rates continue to rise, many homeowners are looking for ways to make extra money to offset their increased mortgage payments. One option that is becoming popular is to rent out a spare room in their home.
There are a few reasons why renting out a spare room is becoming more attractive in a rising interest rate environment. First, the higher interest rates make it difficult for prospective buyers to qualify for a mortgage, which means there are few people who can afford to buy a home. This creates a larger pool of potential renters for homeowners who have a spare room to rent out.
Finally, rising interest rates can also make it more difficult for homeowners to sell their homes. This is because buyers are less likely to be able to afford a home when interest rates are high. As a result, homeowners who are unable to sell their homes may decide to rent them out instead.
If you have a spare room in your home, renting it out is a great way to make extra money and offset the cost of your mortgage. And in a rising interest rate environment, this option is becoming even more attractive.
Not all residential mortgages allow you to let out your property. Here’s what you need to know
- Some lenders have a strict policy that prohibits all forms of letting. If you are caught letting out your property under this type of mortgage, the lender could demand repayment of the mortgage and you could be barred from having a mortgage or other financial products in the future. In the worst case, you could even have your property repossessed.
- Other lenders will permit you to have up to two paying lodgers in your property. While you will need to notify them of this, it is not usually an issue as lodgers can often be very transitory. You will need to declare any lodgers during a refinance as the bank will need occupancy waivers to be signed. If you have a history of receiving income from a lodger, this can also be factored in for affordability. This can help you to access better products, or if required, increase your borrowing.
- Short-term letting is the most restricted across the market. A bank will often check to see if your property has been previously listed, or is currently listed, on short-term letting platforms such as Air BNB. However, there are some highstreet lenders who will permit letting of the whole property for up to 12 weeks per year on a short-term basis, or unlimited letting of individual rooms. This means you can still maximise the potential from your property without needing to move to expensive finance and you do not breach your mortgage conditions.
The cost of choosing the wrong product
Interest rates can vary significantly between different mortgage products. For example, a flexible residential lender could offer a 5-year fixed-rate mortgage with an interest rate of 5.19%. However, a lender offering a specific holiday let product might offer a rate from 8.10%. Based on borrowing £750,000 over a 5-year period, you would pay an additional £21,825 in interest each year with the holiday let product, which equates to £109,125 over the 5-year period.
By speaking to a broker with good market knowledge, you can find a mortgage product that offers you the best possible interest rate for your needs. A broker can compare different products from a variety of lenders and help you find the one that best suits your individual circumstances.
If you are looking to generate additional income from your home and you would like to discuss the finance options available, Orton Financial can offer a free consultation. We recently helped a client refinance their second home which was used for occasional short-term letting. You can read this case study here.