Lenders let in lodgers

Mortgage lenders are increasingly giving the green light to home owners to rent out spare bedrooms, helping borrowers reduce mortgage arrears and prevent repossessions.

Borrowers should still advise mortgage lenders and insurers before taking a lodger, but consent is normally a formality.

Lenders have adopted a more liberal attitude partly because changes in housing law have reduced tenants' rights that could hamper repossession action.

As an extra inducement to home owners, rent from lodgers of up to pounds 3,250 is free of income tax, under the Government's Rent-a-Room scheme. This applies to rental agreements for furnished bedrooms, with shared use of other areas of the house. The agreements do not require a written contract and can be informal. Renting of self-contained flats or entire homes is eligible for the so-called lettings relief, which offers a certain amount of tax relief against rental income.

Taxpayers who complete an annual tax return must provide details of rental income in their returns even if it is under the pounds 3,250 threshold. Those who do not submit returns do not have to notify the Inland Revenue of rental income below the threshold. Details of tax relief for rented accommodation are set out in the Inland Revenue's Rooms to Let booklet (IR87).

Setting a rent can be difficult, but rents quoted in local newspaper advertisements should give a guide. The London University Accommodation Office, which places properties on its list for pounds 8 a year, states that average rent for a room in London is pounds 50 to pounds 60 a week. Rents vary enormously across the country, with location and condition the key factors. Local authorities and universities commonly hold lists of available accommodation, and most will advise on suitable rents. To be placed on these lists properties will need to be inspected for suitability, and will usually need a gas- safety certificate. Many councils provide an information pack to prospective landlords, while a free leaflet, entitled Letting Rooms in Your House, can also be obtained from the Department of the Environment.

There are several pitfalls that home owners need to avoid, and it can be sensible to enter into a formal agreement with a tenant. This might include a deposit - a fortnight's advance rent is normal - and even how many guests the tenant can have staying over.

Both landlord and tenant should be aware of possible problems with insurance. A claim arising from a burglary may be rejected if it results from doors or windows being left open or unlocked, sosecurity arrangements need to be agreed with tenants. Lodgers also need to be aware that the home's contents policy will not cover their belongings, and they should be encouraged to take out their own policy.

Even though it is easier now to evict a tenant than it used to be, it remains an unpleasant process. The best advice is to be very careful when vetting prospective tenants, and only to take in a lodger that you are completely confident you will get on with. If chosen well, the lodger may turn out to be good company and a lasting friend, as well as a very useful contributor to the household income.