Can You Use Lodger Income When Remortgaging?
Yes, it is possible to use lodger income to support a remortgage application, although not all lenders will accept it. The way lodger income is treated varies considerably across the mortgage market, so it is important to understand where you stand before applying.
Some mainstream lenders will accept a percentage of your lodger income, typically between 50% and 100%, when calculating your overall affordability. Others may disregard it entirely or only accept it under specific conditions. The key factor is whether you can provide sufficient evidence that the income is regular and sustainable.
Lenders who do accept lodger income will usually want to see that you have a formal agreement in place with your lodger, along with evidence of regular payments over a period of time. Bank statements showing consistent deposits from your lodger over at least three to six months are typically required.
It is worth noting that lodger income is different from rental income in the eyes of most lenders. A lodger lives in your home and shares communal areas, whereas a tenant occupies a separate property or a self-contained unit within your property. This distinction matters because lenders assess these two types of income differently.
The Rent a Room Scheme allows you to earn up to a set tax-free threshold each year from letting out furnished accommodation in your main home. As of the current tax year, this threshold is 7,500 pounds per year. If your lodger income falls within this allowance, you will not need to pay tax on it, which simplifies your financial position for lenders.
Working with a mortgage broker who understands which lenders accept lodger income can save you considerable time and improve your chances of a successful application. They can match your circumstances to the most appropriate lender and help you present your application in the strongest possible way.
How Lenders Assess Lodger Income for Remortgages
Understanding how lenders evaluate lodger income will help you prepare a stronger remortgage application. Each lender has its own criteria, but there are some common approaches you should be aware of.
Percentage-based assessment. Many lenders that accept lodger income will only use a proportion of it in their affordability calculations. For example, a lender might take 50% or 75% of your declared lodger income and add it to your other earnings. This discounting reflects the fact that lodger income is not guaranteed and could cease if the lodger moves out.
Evidence requirements. Lenders will typically ask for several pieces of evidence to verify your lodger income. These commonly include:
- A written lodger agreement - A formal agreement setting out the rent amount, payment frequency and notice period
- Bank statements - Usually three to six months showing regular payments from the lodger into your account
- Tax returns - If the income exceeds the Rent a Room Scheme threshold and you are declaring it to HMRC
- Proof of the lodger's identity - Some lenders may request this as part of their due diligence
Minimum income requirements. Some lenders will only consider lodger income alongside a minimum level of primary income from employment or self-employment. They want to see that you could still afford the mortgage payments without relying entirely on lodger income.
Property suitability. Lenders may also consider whether your property is suitable for having a lodger. A one-bedroom flat, for example, would raise questions, whereas a three-bedroom house with a spare room is much more straightforward.
It is important to be completely transparent with your lender about your lodger arrangement. Attempting to present lodger income as something it is not could be considered mortgage fraud, which carries serious legal consequences. Always declare the arrangement honestly and provide accurate documentation.
The Rent a Room Scheme and Your Remortgage
The government's Rent a Room Scheme is a tax incentive designed to encourage homeowners to let out spare rooms in their main residence. Understanding how this scheme works is important because it directly affects how your lodger income is treated for tax purposes and, by extension, how lenders view it.
Under the Rent a Room Scheme, you can receive up to 7,500 pounds per year in gross rental income from a lodger without paying any income tax on it. This figure is halved to 3,750 pounds if you share the income with a partner or another person. The scheme applies to furnished accommodation in your main home, including situations where you provide meals or cleaning services.
If your lodger income exceeds the tax-free threshold, you have two options. You can either pay tax on the amount above the threshold, or you can opt out of the scheme entirely and pay tax on your total lodger income minus allowable expenses. An accountant can advise you on which approach is more tax-efficient for your circumstances.
From a remortgage perspective, the Rent a Room Scheme can be advantageous because it simplifies the documentation you need to provide. If your income falls within the threshold, you may not need to submit tax returns specifically for this income, although bank statements showing the payments will still be required.
However, some lenders may actually prefer to see the income declared on a tax return even if it falls within the Rent a Room Scheme threshold. This is because a tax return provides a more formal record of the income and demonstrates that you are managing your finances responsibly.
It is also worth noting that the Rent a Room Scheme only applies to your main residence. If you are letting a room in a property that is not your primary home, different tax rules apply and the income would be assessed differently by lenders. In such cases, you would be treated more like a buy-to-let landlord.
Before applying for a remortgage, make sure you understand your tax position with regard to lodger income. Getting this right from the outset will avoid complications during the application process and ensure that you are presenting accurate information to your lender.
