Ask the expert: Obtaining a large mortgage

Mortgage adviser Duncan Pownall

BBC News website's Ask the Expert column gives readers a chance to have their financial questions answered.

This week Bradford & Bingley mortgage expert Duncan Pownall helps Your Money reader Ms Cashin.

Ms Cashin wants to know whether her plans to rent out a room will count in her favour when she approaches lenders for a large mortgage.

Duncan Pownall writes:

Banks and building societies are increasingly taking the income that can be earned from renting out a room into account when deciding how much to lend.

However, most lenders will make the decision to take rental income into account on a case-by-case basis.

In short, be prepared to accept that some lenders will refuse point blank to include rental income in their calculations.

If you can't persuade your mortgage lender to take rental income into account, don't give up hope, you may still be able to secure a large mortgage.

In the past, mortgage loans based on three times salary was the norm, but today some lenders will loan more than four times salary.

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In addition, some lenders will look at disposable income when deciding how much to lend.

Therefore, if you have few debts, or are in receipt of government tax credits, you might find that you can secure a larger loan.

Balancing risk

But large mortgages come with big financial risks.

Apart from the obvious risk that you will be saddling yourself with a large debt, there is the risk that you won't be able to rent out your room.

According to the Association of Residential Letting Agents (ARLA) rental property is vacant on average for nearly a month each year.

To be safe it is best to presume that you won't be able to find a lodger for at least one month in every twelve.

Another important consideration, when letting property, is to ensure you have a rental agreement, called an assured short hold tenancy agreement, in place.

This gives protection to both you and your tenants, especially in the event of rental arrears or needing to evict.

Remember, you may be able to benefit from the government's 'rent a room' scheme, whereby homeowners can charge rent of up to £4,250 tax free, within a given tax year.

The rent charges have to remain below the £4,250 threshold if the payments received are to be completely non-taxable. Any amounts above this are taxed.

The scheme only applies to a property where it is the main or only residence and the person renting the room shares meals and facilities with the rest of the household.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.