With household incomes falling in real terms under the pressure of rising inflation, the prospect of a further rate increase, perhaps as soon as Thursday is forcing mortgage borrowers into a radical rethink of their family finances...

In a survey of mortgage borrowers conducted by propertyfinder.com at the end of July 2007, 24.6% say that taking in a lodger was one option they would consider in order to boost their incomes if interest rates rise.  A further 19% said they would consider it if they could, but don’t have the space for one.

The need for extra income is clear.  The average outstanding mortgage in the UK totals £96,000*.  If the Bank of England raises interest rates to 6% on Thursday, a typical borrower will have seen his mortgage repayments rise by £79 per month** since rates began to rise. 

For new borrowers, the combination of rising house prices and rising interest rates means they will need to find an extra £156 per month compared to a similar borrower twelve months ago.

Feeling the pinch

Warren Bright, chief executive of propertyfinder.com said: “Mortgage borrowers are feeling the pinch of higher repayments and many are looking around for sources of extra cash.

There are at least 26 million spare rooms in the UK, on average that’s one for every household.  Around half of these belong to those with mortgages.

Of course, it’s a huge change to consider taking a stranger into your home so in practice, only a tiny proportion of homeowners would do it. However, for many people, especially for younger homeowners, those who live alone or who don’t have children, it can be a very attractive option. 

“What’s more, there is tax relief available too.  Under the government’s Rent a Room scheme, householders are allowed to receive £4,250 in income tax free if they rent a room to a lodger, equivalent to £82 per week.”

Caution required

David Salisbury, Chairman of the NLA, said, "People need to be careful when taking someone unknown into their home. Formal written agreements between the lodger and landlord are a must for anyone considering this route.

“The extra income a lodger can provide is great but people should be cautious of relying on it - lodgers are short-term and landlords should be wary of relying this income.

The NLA would recommend getting formal advice from a reputable landlords association before entering into any arrangement with a lodger."