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My son and daughter-in-law are currently separated. They have 2 kids, and I have a great relationship with my daughter-in-law. I have had a relative die, and she is paying over the odds for rent, so I have decided to take out a buy to let mortgage for her and my young grandchildren. My son has nothing to do with the property.

Am I going to fall foul of the rules regarding letting to family members? I've been asked if I'm letting to direct family (i.e. son/daughter/grandchildren) which I've honestly answered "No" as the grandkids are too young to rent (both under 5) and my daughter-in-law is not technically related.

We do have a lease drawn up.

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    This seems more like a legal question than a finance one. – Peter K. Mar 19 '15 at 11:39
  • Not necessarily. I'm not familiar with the UK rules OP refers to, but this might be a tax question if those rules are just about the financial/tax penalties in this situation. – JohnFx Mar 19 '15 at 14:46
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    Is Daughter-in-law really not considered a relative ? – JTP - Apologise to Monica Mar 19 '15 at 15:38
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    Is there a distinction between separation and divorce in the UK? If they are not actually divorced, your daughter-in-law might still be considered a relative. – Kent A. Mar 19 '15 at 15:41
  • @JohnFx: My father was a tax lawyer, so I tend to see all tax questions as legal questions. :-) – Peter K. Mar 19 '15 at 18:30
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The final arbiter of what is allowed, or not allowed, for a given mortgage is the mortgage provider. If you were to omit essential information during your application, and if the mortgage provider were to find out, the consequences could be serious.

Bearing in mind I'm neither a lawyer nor a financial expert, the full definition of what the Financial Conduct Authority defines as a family member may be of interest.

PERG (Perimeter Guidance Manual), section 4.4.9, says:

'Related person' is defined in article 61(4)(c) of the Regulated Activities Order as meaning the borrower's spouse, civil partner, parents, grandparents, siblings, children and grandchildren. An unmarried partner of the borrower whose relationship with the borrower has the characteristics of the relationship between a husband and wife is also included; this can include a person of the same sex as the borrower. Stepchildren, however, would seem to be excluded.

However, in the previous paragraph, it says that this is only relevant if:

the lessee is a 'related person' to the borrower

As the question states, a child is too young to be a lessee (i.e. tenant).

However, the aforementioned Regulated Activities Order states that this is relevant if the property:

is used [...] as or in connection with a dwelling by the borrower [...] or by a related person;

suggesting that mere use by a relative is sufficient to meet the definition.

(See also here, here, and here).

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There are now (due partly to the EU) spatial rules and safeguards a lender must keep to before approving a BTL (but to let) mortgage where a relative of the landlord will be living in the property. This is partly due to the landlord being less likely to evict a relative if they don’t page. These rules require the landlord to show that their employment income is enough to pay the mortgage on both their own home and the “rental” without taking into account any rent they may receive. There are large penalties for any lender that does not keep to these rules, therefore are present most lenders just refuse to land in such cases.

Therefore a few years ago you could have got a special BTL mortgage that would allow it, but now very unlickly…..

Grandchildren living in the property clearly full within the spirit of the new rules, lenders are not very forgiving about you breaking their terms and conditions. Because a normal BTL mortgage is an unregulated product the lenders can do to you as they wish, and do not have a regulator requiring them to be fair and reasonable.

(I think Steve Melnikoff is correct in his answer that the new rules will catch even with a strict reading of them. But so what the lenders will not touch you if you come anywhere close to the new rules.)

Maybe your BTL mortgage was taken out before the new rules come in, and its T&C does not include “is used by a related person”, however the mortgage company gets to decide what there T&M mean not you, and they can just require you to repay the mortgage if they are not happy.

You have no right of appeal unless you can afford a very expensive court case. Most lenders also have T&E saying they can change the T&Cs in any way they wish and the courts have let them do so with past cases.

Therefore you are taking a big risk renting to your daughter-in-law if you have a normal BTL mortgage.

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