Taking in a lodger is helping many people offset the cost of living crisis and high inflation levels affecting many people this winter.
It has been many people’s traditional route into property investment, but is lodging now an essential to combat high inflation? This blog post investigates.
What is a lodger?
According to Citizen’s Advice, “A lodger is someone who lives with you in your home and shares living space with you, such as the bathroom or kitchen. They might have their own room, but they live in your home with your permission and have agreed they don’t have the right to exclude you from their room or any part of your home.”
What’s the difference between lodging and subletting?
A subtenant and a lodger can both rent rooms, although a subtenant can also rent an entire property rather than just a part of it. The main difference between a subtenant and a lodger is that a subtenant has exclusive use of their room. Their landlord needs permission before they can enter a subtenant’s room. A lodger’s landlord can enter the lodger’s room without permission and often does so to provide services such as cleaning.
In practice, if you share some living space with your landlord such as the bathroom or kitchen, then your rights are similar whether you’re a subtenant or a lodger. People who share accommodation with their landlord are generally known as ‘excluded occupiers’. This is a term used in housing which helps to identify your housing rights. Excluded occupiers have very limited rights.
What are the benefits of lodgers?
A lodger can have many advantages:
Money: A lodger provides extra income.
Personal safety: Having someone else around can often feel safer than living alone.
Splitting chores: An extra pair of hands saves time on chores.
Easy to evict: Unlike tenants, lodgers are relatively easy for the landlord to evict, and it is not long or expensive. There is no minimum amount of time that needs to pass.
Rent A Room Scheme: This may not apply to all landlords, but those it does, it’s a pretty big advantage. If you rent a room in your home, you can get up to £7,500 tax free income.
Your house rules: Because the flat/house is your main place of residence, the balance of rights is in your favour.
Friendship: Taking in a lodger is a good way of forming new friendships.
Culture: Many landlords take in lodgers from overseas, thus cultural knowledge can improve.
What is the cost of living crisis?
The current economic climate is closely linked to high inflation. This is a measure of how fast costs have risen year on year, expressed as a percentage.
The annual rate of inflation was 10.7% in November 2022. This means that the cost of everyday essentials is 10.7% higher than in November last year.
The current crisis is particularly severe because there are several different factors pushing up prices, rather than certain items becoming more expensive.
Why get a lodger in the current high inflation period?
Kellie Steed, Mortgage Expert at money.co.uk, said, “One way you can benefit from taking in a lodger is through the government’s Rent a Room scheme. This allows live-in landlords to earn up to £7,500 a year of tax-free cash, anything after that will be taxed. If you make less than the £7,500 threshold, then you don’t need to do anything and your tax exception is automatic. However, if you earn above this threshold you can opt into the scheme by letting HM Revenue and Customs know on your tax return, this way you can still claim your tax-free allowance. You can opt into the scheme at any time if you are a residential landlord and if you run a B&B or guesthouse.
“If you plan to rent out a room privately, the amount you make really depends on the location of your property, its condition and the size of the room. To get a general idea, it is estimated that the current average for a double room in the UK is £90 a week. As well as charging for rent, you could also charge a lodger for council tax, utility bills and even cleaning and food if provided. This would be a big help for those struggling with the rising costs of living on their own.
“If you are planning on buying a house in the near future, another great benefit of having a lodger is that this added stream of income can improve your affordability when applying for a mortgage. In turn, this might provide you with better deals and larger loans. However, you should be aware that not all lenders will take this into account given the short-term nature of having a lodger and it may only be the most flexible lenders that look at the whole picture.
“It’s also important to note that taking in a lodger can affect any benefits you receive. If you receive means-tested benefits such as a Housing Benefit, the first £20 of weekly income from your lodger will be disregarded, as well as 50% of anything over £20 if you provide your lodger with food. You will also remain responsible for paying council tax when taking in a lodger and will no longer benefit from the 25% single-person discount if you previously lived alone.”
As well as financial benefits, people are looking for lodgers for company and valuable skills.
Jane McNamara, 51, a schoolteacher has shared her home in London with a. 27-year-old mature student Vee since February last year. In return for affordable room rent, Vee helps with childcare and looks after her dog.
Jane says, “I am a single parent and want to go out sometimes but babysitting is expensive and my teenager doesn’t need interaction. I’m really happy with the agreement. It’s also allowed us to have a dog, as Vee is in a lot during the day. We will keep having one in future. She’s really nice and I’ve enjoyed chatting to her a lot. I was worried about sharing a bathroom between three of us but it’s been fine.”
Meanwhile, Gaynor, 65, took in Christy, in her late 30s, when she was recovering at her home in London after surgery and needed help with shopping and chopping food, as well as wanting the extra company.
In both cases they connected through Hapipod, a site launched last summer as a way to reduce midlife loneliness while enabling key workers and students to find less expensive accommodation close to their universities, hospitals and other places of work.
“It is all about offering an affordable way for people to find an ideal home-share that will create mutual benefit and enable both parties to live their best home lives,” says Andrea Frantenthal, Hapipod’s founder.
“There are 3.4 million young adults alone who cannot afford market rents and who would happily offer some of their time to such activities in exchange for affordable loans.”
Do you need to check with the lender before approaching a lodger?
“With mortgage rates are they are, we’re seeing a lot of customers asking about ways in which they can make mortgage payments easier to manage,” says Rosie Rish at the mortgage broker Habito. “One way to ease the lead is by taking in a lodger.” Most mortgage lenders have no issue with homeowners doing this, she adds.
But there may be conditions. “Some lenders explicitly state that there must be no formal letting agreement. As a rule, you should always inform your existing lender of any changes to your financial circumstances.”
You might find that if you are remortgaging at the moment you could get a slightly bigger loan by taking in a lodger, too. A handful of mortgage lenders will accept lodger income as part of the affordability assessment, where the lender looks at how much income you have to decide how much to let you borrow.
Fish says Santander will use 60% of a lodger’s rent to support a mortgage application, although it will need at least three months of bank statements showing payments from the lodger.
Darlington Building Society takes into account 75% of up to £7,500 of lodger rent each year, while Foundation Home Loans and the Loughborough and Vernon Building societies will consider 50% of lodger income, and Norton Home Loans and Vida Homeloans will consider accepting 100% of lodger income.
In reality, lodger income can only really be taken into account for remortgages, as lenders will expect to see evidence of the homeowner receiving payments, Fish says. “For new mortgage applications, lenders will usually support a home purchase where the owner intends to take on a lodger. But they won’t take the projected income derived from the lodger into consideration as part of the application.”
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