Have you come across a term called “house hacking”? It’s commonly used in the US to describe a method used to try and self-finance a mortgage. But is house hacking in the UK a possibility?
In this insight, we will cover what house hacking is, and if it’s possible to house hack in the UK.
- House hacking in the UK will go some way to paying your mortgage costs, but possibly not all.
- You can benefit from the rent-a-room scheme allowing you to earn tax-free income from your house hack.
- Most lenders allow lodgers in the house, but you must also be a resident of the property.
- UK House hacking might not be sustainable as regulation and tax rules can change at any time.
What is house hacking?
House hacking involves purchasing a property with a mortgage. Once completed, the idea is to rent out a room. The money made from the rental income is used to pay mortgage repayments. In theory, this could result in you not having to pay for the mortgage at all.
The purchase becomes self-financing as long as you have a room to rent and a tenant willing to live with you. The alternative to house hacking would be to purchase a buy-to-let, however, getting a buy-to-let as a first-time buyer is becoming increasingly difficult.
Is House hacking in the UK financially possible?
Many people are looking for ways to save on their bills. House hacking is becoming a popular concept. House hacking in the UK will not be the same as house hacking in the USA. Let’s go through an example of how house hacking in the UK could work, taking into account the costs involved.
UK House hacking example
If you bought a property in the UK in December 2023, the average price would be £262,068. If you can finance a mortgage with a 10% deposit, you can expect an interest rate of around 4.2%.
Over a 35-year term, a loan amount of £235,800, repayments would be £1,057 per month.
If the term was stretched to the maximum of 40 years, repayments would be £1,000.
If you have a larger deposit of 20%, a 40-year term would be £800 at a rate of 3.4%.
Please note that these figures are estimates and do not account for legal, conveyancing, or product fees.
The question then becomes, “Is someone willing to pay £800 a month for a room?” According to SpareRoom.co.uk, the average room rent across the UK was £626 in Q3 2022.
The short answer is no; house hacking in the UK is not financially possible. However, it could go some way toward helping a house hacker finance their property.
House hacking in the UK with the rent-a-room scheme
If you let out your property, you earn rent. That rental income must be declared for tax purposes. However, if you rent a room out. You can earn tax-free income up to £7,500. This is thanks to the Rent-a-Room scheme.
The scheme allows you to rent out as much or as little of your furnished home while you continue to live in it. If you earn below the £7,500 threshold, you do not need to complete a tax return.
This is good news for house hackers in the UK, as it means less money in HMRC’s pockets and more towards the mortgage costs. It’s also worth noting that £7,500 is £625 per month. This allowance is £1 off the average room rent in the UK. Is that a funny coincidence?
The bad news is that if you earn above this threshold, you will need to pay tax on the income at the same rate that you pay income tax.
Do lenders allow house hacking in the UK?
Every lender has a different policy. Most lenders allow for lodgers, however, this decision will be specific to your mortgage terms. You must check before beginning any house-hacking ventures.
Despite lenders allowing lodgers, it is unlikely they will take the additional income into account for mortgage affordability purposes. That means you need to be able to afford the mortgage on your current income for it to be approved by the lender.
Is house hacking just subletting?
Sub-letting would generally refer to renting a property and then renting out a room within the property on a new tenancy agreement. A Sub-letting agreement would need to be done by your landlord. It is unlikely your landlord would approve of subletting a room within their existing rental property without managing it themselves. Your landlord will expect a slice of the pie. or all of the pie in most cases.
What to be aware of when house hacking in the UK
There are a few further considerations to be aware of before you decide whether to proceed. Most of these will have a financial impact and could make house hacking a less attractive idea.
- It can be inconvenient having a stranger living on your property. You will need to adjust to having them around and may disagree with their habits.
- Tenants are unreliable. They may miss rent payments and that could leave you out of pocket paying your mortgage.
- If you take on a lodger this may affect your ability to obtain home insurance. If you can, it should increase the premiums of your policy as you have another person living in the house.
- They may damage your property and expect it to be kept to a high standard. This will require further maintenance payments, leaving less to cover the mortgage.
Is house hacking in the UK sustainable?
There is a possibility that the UK could reintroduce tax by removing the “Rent-a-Room” scheme at any time. This would leave you exposed and could result in you needing to pay the mortgage yourself or ending the agreement and moving properties.
You also need to consider whether you are happy renting a room for a sustained period. How does renting a room impact your long-term goals? You will need to put a long-term plan in place to decide what to do with the property once you are fed up with house hacking.
Is house hacking in the UK worth it?
Overall, house hacking is a brilliant concept. After all, who wouldn’t want their mortgage being paid for them?
The reality is different. There are lots of considerations. Many issues could arise that set you back. It is a risk. However, depending on your circumstances, you may enjoy living with someone else and not be too dependent on income.
With the Rent a Room scheme allowing the tax-free benefits, if you are on board with the concept, having a room to rent out will at least go some way toward paying the mortgage. Perhaps not all of it; as we have demonstrated, that is unlikely.
If you would like more information on these types of topics and great financial advice, I would recommend Sunny Avenue.
Sunny Avenue was built with one intention: To help people, help people. They do this by giving specialist advisers a platform to meet new clients and help with their financial needs.
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