House Hacking in the UK

Have you heard of the term "house hacking"? It's a popular method in the US used to self-finance a mortgage. With everyone always looking for new life hacks in the UK, there is a new trend arising - House Hacking UK - Is it possible??

In this insight, we'll explore what house hacking is and examine whether it's a viable option for those living in the UK.

Key Takeaways

• 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 lodger 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 is a strategy that involves buying a property with a mortgage and renting out a room to pay for the mortgage payments. The idea is to make the purchase self-financing, as long as there is a tenant willing to live with you. This is a viable alternative to buying a buy-to-let property, which can be difficult for first-time buyers to secure.

Let's say you purchase a 2-bedroom flat with a mortgage in a desirable area. Your mortgage payment is £1,000 per month. You decide to rent out the second bedroom for £700 per month.

With the rental income of £700, you can put that towards your mortgage payment, which brings your out-of-pocket expense down to £300. As long as you have a tenant in the second bedroom, you're able to cover some of your mortgage payments, spending less of your own money.

Over time, if the rental income increases or if you pay down your mortgage, you could potentially turn a profit on the property or use the extra money to invest in another property.

Is House Hacking in the UK Possible?

Saving on bills is a top priority for many people, and house hacking has become a popular concept. While house hacking is well-known in the USA, the UK experience will be different. We can explore an example of how house hacking in the UK might work based on rental statistics, factoring in the associated costs.

UK House hacking example

According to the Halifax House price index report, If you bought a property in the UK in February 2023, the average price was £285,476. If you are able to finance a Mortgage with a 10% deposit you can expect an interest rate of around 4.2%. 

If you take out a loan of £236,000 over a 35-year term, your monthly repayments would be £1,060. However, if you opt for the maximum term of 40 years, your monthly repayments would be slightly lower at £1,000.

If you have a larger deposit of 20%, you could potentially qualify for a lower interest rate. For example, a 40-year term with a deposit of 20% could result in monthly repayments of £800 at a rate of 3.4%.

It's important to note that these figures are estimates and do not include additional fees such as legal, conveyancing, or product fees.

The question then becomes, is someone willing to pay £800 a month for a room? According to research conducted by Spare Room, the average room rent was £626 across the UK in Q3 2022.

The short answer is no, a full house hack in the UK is not financially possible. However, if you are happy with a partial contribution, it could go some way to 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 are able to 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 whilst 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 pockets and more towards the mortgage costs. It's also worth noting that £7,500 is £625 per month. This allowance is £1 off of 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. It's important that you 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.

If you're arranging Buy to Let mortgages to house hack, remember to benefit from the rent a room scheme, you must also live in the property and that would violate the terms of the buy to let mortgage.

Apply for a mortgage promise to find out if it is affordable for you to buy without the income from the lodger included. 

Is house hacking just sub-letting?

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 sub-letting a room within their existing let property without managing it themselves. Your landlord will expect a slice of the pie. Or all of the pie in most cases.

House Hacking in the UK Considerations

Before you make a decision on whether to proceed with house hacking, it's important to consider a few factors that could make it a less appealing option, especially from a financial standpoint:

• Having a stranger living in your property can be inconvenient and you may have to adjust to having them around, potentially disagreeing with their habits.
• Tenants can be unreliable, missing rent payments and leaving you out of pocket while you still have to pay your mortgage.
• Taking on a lodger could affect your ability to obtain home insurance, or increase the premiums of your policy as you have another person living in the house.
• Your lodger may damage your property and expect it to be kept to a high standard, requiring further maintenance payments and leaving less money to cover your mortgage.
• Splitting utility bills with your lodger could increase your financial liabilities and offset the income you receive.

Is house hacking in the UK sustainable?

It's important to consider that the UK government could remove the Rent a Room scheme at any time, leaving you exposed and possibly having to pay the mortgage yourself or end the agreement and move properties.

Additionally, you should think about whether renting a room for a sustained period aligns with your long-term goals, and put a plan in place for what to do with the property once you are done house hacking.

Is House Hacking in the UK Worth It?

The House hacking in the UK trend may seem like a great way to have your mortgage paid off, but in reality, there are several factors to consider. It's important to remember that there is some risk involved, and various issues could arise that may set you back. However, if you enjoy living with someone else and are not too reliant on the rental income, house hacking could work for you. With the tax-free benefits provided by the Rent a Room scheme, having a room to rent out can help cover some of the mortgage costs, though it's unlikely to cover it all, as we've demonstrated.