Rent your spare room to save money on your mortgage

Replacing loads of junk with a lodger can give you tax-free cash

Rosie Murray-West – Virgin Money Living Mentor

by Rosie Murray-West | Independent Money Mentor

Award-winning personal finance and news journalist

If you have a spare room in your house, taking in a lodger can help you to pay off your mortgage more quickly, or to have spare cash available for other things.

The Government provides a generous tax break to those who take in lodgers, but you must comply with the rules or face a hefty bill. There are also other issues to consider, including insurance and ensuring that you have the correct arrangements with your lodger in place so that everything goes smoothly.

The Rent a Room Scheme

Rent a Room is an optional scheme that allows you to receive £7,500 a year tax free (or £3,250 each if you are a couple) from renting out a room in your house. At present this is available for those who rent on a short or a long-term basis, though the government has suggested that it might change this so that those who rent for the short term get a smaller tax break.

To be eligible for the scheme, the room must be furnished, and part of your main home. There are further responsibilities too – see’s Rent a room in your home section for more information. You don’t need to rent out your room seven days a week – sites such as allow you to advertise a room to rent during the working week only, allowing you to enjoy your home to yourself each weekend while still being eligible for the tax-free earnings up to £7,500.

Savings on your mortgage

The Rent a Room tax break means that you can earn around £625 a month from your home without paying any tax on it. With the average UK monthly mortgage repayments standing at around £670, this could be a considerable help with household costs, or could help you to pay off your mortgage early – check with your lender to see if they allow overpayments.

For example, if you had a 25 year mortgage of £250,000 at 3.5 percent and put £625 a month overpayment into it from renting a room out, you could pay off the mortgage almost 11 years early.

Issues to consider

Before you rent a room in your home you must gain permission from your mortgage lender and your insurer. If you do not you could be in breach of your mortgage contract and insurance claims may not be paid if any damage occurs related to the rental. Your insurance premium may also increase.

It is also best practice to get an agreement in writing with your lodger – although this is not necessary to gain the tax break. Unlike letting out a whole property, the agreement would not be a Formal Tenancy Agreement but at Lodger Agreement, it will help set out some basic rules for someone living in your home and protects you both if disagreements arise. You can find out more and buy a Lodger Agreement from Spareroom.  

If the lodger shares your home you only need to give them ‘reasonable notice’ if you want them to leave, and it doesn’t have to be in writing.

If you think you will have significant expenses from renting your room out you may be better off declaring your income and expenses, and paying tax on the profit minus the expenses. A specialist tax adviser or accountant could help you to decide which is best for you if you are confused, or there is more information on the Rent a Room Scheme and alternatives on the website.

Before making financial decisions always do research, or talk to a financial adviser. Views are those of our mentors and customers and do not constitute financial advice.