So you’ve bought your first home? The early years of a mortgage can be daunting, but what if there was a way to cut your repayments, fund some home improvements or even get mortgage-free faster? “House hacking” could help you do it.
“House hacking” is a new name for an old practice. If your mum kept students or your grandparents had a lodger, they were house hacking too. Like you, their home was probably their biggest asset. Hacking it was about maximising the value and usefulness of what they already had.
Do it right and the home you saved so hard to buy, and that you will work so hard to pay off, could become a valuable income stream.
Unlike your mum or your grandparents, cooking dinner for a lodger will be a step too far for many of today’s first-time buyers; the good news is, you don’t have to do it.
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By renting a spare room, homeowners can qualify for rent-a-room tax relief. This allows you to earn up to a maximum of €14,000 a year tax-free, says Rory Lynskey of Taxback.com.
If you’d be thrilled to get a €30,000 a year pay rise, then you should consider renting a room – because that’s what €14,000 tax-free income equates to, says Shane Tobin, CEO of Truewealth.ie.
“Everybody should consider €14,000 a year tax-free; that’s €30,000 gross if you were to earn it,” says Tobin.
“It’s a fantastic incentive, it’s brilliant. I would encourage anybody to open their minds to it. The money can provide many solutions for first-time buyers and others,” he says.
An extra €14,000 a year in tax-free money, or €1,166 a month, could go a long way towards cutting your mortgage repayments, reducing your mortgage term or funding renovations.
But before you spend it, you need to make it first. That means getting a housemate.
“The rent-a-room relief only applies where the letting is part of your main residence,” says Lynskey of Taxback.com.
Crucially, the relief generally excludes short stays. So the person you rent to must use the room on a long-term basis, meaning they live there for more than 28 days in a row.
Renting a room to a full or part-time student, including language students, or providing four-day week “digs” is allowed under the scheme too, according to Revenue.
But providing accommodation to occasional visitors for short periods, through websites for example, is not. Income from Airbnb or other short-term letting platforms does not qualify for rent-a-room relief, says Lynskey.
[ What is house hacking and is it the right move for you?Opens in new window ]
“Revenue will treat this as trading income – much like running a small business. That means the income is fully taxable,” he says. “You can however deduct some relevant business expenses such as cleaning, utilities and booking fees before tax is calculated.”
If you’re exploring renting a room to get rent-a-room relief, be sure to crunch the numbers first. Not every homeowner is going to be able to charge and earn the full €14,000 a year, or €1,166 a month, the maximum amount on which relief is allowed.
Check property websites for room rental rates in your area to understand what’s realistic. You could contact local language schools too.
That €14,000 you can earn under the rent-a-room scheme must include all charges too, including the cost of things like utilities, according to Revenue. So don’t expect that, in addition to the rent, you can split the bills.
If the income you earn from renting a room exceeds the €14,000 limit, the entire amount becomes taxable, not just the excess.
People renting out a room or rooms in their own home are not required to register with the Residential Tenancies Board (RTB), so it’s a bit less onerous than being a landlord.
The rental can be a self-contained unit within the house too, such as a basement flat or a converted garage. If this unit is not attached to the property it cannot qualify for the relief, says Revenue.
Regardless of whether you go the Airbnb route or avail of rent-a-room relief, you will need to fill out a tax return to declare the income, even if it’s tax-free under rent-a-room relief.
Know your ‘why?’
An extra €14,000 a year in income is appealing, but before advertising for a housemate, it’s good to know your “why”. Having a specific plan for the income can make sharing your space easier to sustain. It can help you put the money to best use too.
First-time buyer Áine decided to advertise for a housemate two years into the mortgage on her two-bed apartment. After 14 years of houseshares, she relished having her own space. But when she decided to take a one-year career break to do a full-time master’s, she opted to rent a room to help pay the bills.
“I knew the master’s would take a year. I could have covered the mortgage from savings, but I didn’t want to lose ground when there was the option to rent a room.”
Having a housemate covered two-thirds of her monthly mortgage repayment, meaning her savings were less depleted when she returned to employment. The income provided peace of mind against interest rate rises too.
“It was hard sharing again, especially in the evenings as the tenant rarely went out in the evenings and was in the apartment for most of the weekend,” Áine says. “But I knew it was short term, and any time I got frustrated, I tried to think of the savings.”
[ Renovating your home? Five simple steps to keep your project on trackOpens in new window ]
Áine had herself rented a room from a first-time buyer when she returned from Australia. She had seen how it worked to the homeowner’s advantage.
“I moved in but after a year, she told me she didn’t want to rent the room any more as she had saved enough to do the kitchen. I didn’t know at the time I was there to pay for her kitchen.”
Before taking in a tenant, get forensic about your household running costs. As the €14,000 you can earn under the rent-a-room scheme must include the cost of utilities, you should run the numbers before setting your rent.
Use comparison websites to make sure you have the most cost-effective TV, broadband, bin charges and energy tariffs. Advise your tenant of fair usage of heat and hot water too.
A housemate who works from home, keeping the heat on all day, or who likes a scalding bath a few times a week could eat in your returns.
Have a plan
As with any extra income, if you don’t have a specific plan, the money can disappear into lifestyle creep.
“Whether it’s rent, a bonus or a pay rise, if you don’t have a plan for the money, there is a risk it will fritter away. Lifestyle finds a way of soaking up any extra cash,” says Shane Tobin.
An extra €500 a month going into your current account can easily get swallowed up in lifestyle spending, so be sure to put it to specific use before you get used to spending it. Be intentional about the new income.
Putting a housemate’s rent directly into your mortgage for example can be a very productive move, says Tobin.
“Tell your lender you want to increase your mortgage repayment, increase your direct debit. Just get money out of your spending the minute it comes in,” he says.
He gives the example of a first-time buyer with a €300,000 mortgage over 30 years at a mortgage interest rate of 4 per cent.
“If you push that €500 a month in rent into an overpayment on your mortgage, you would be mortgage-free in 18 years rather than 30,” says Tobin.
“That’s €90,000 in interest you would have knocked off the cost of your mortgage. You’ll be knocking 12 years off your mortgage term.”
You probably won’t want a housemate for 18 years, but their rent will at the very least cut your monthly mortgage monthly repayments in the here and now.
Renovation money
If your kitchen needs a glow-up, or you’re saving for solar panels, getting a tenant in can fast track your plans.
Take in a tenant, or tenants who are paying rent up to the maximum €14,000 a year rent-a-room threshold, and you’ll have saved most of the cost of a €30,000 kitchen makeover in just two years. And you’ll have funded the works far more cheaply than by taking out a bank loan, for which you would be paying interest at around 7 per cent per annum.
The cost of solar panels for a mid-terrace home is about €6,000 after the Government grant, according to estimates from Sustainable Energy Authority Ireland (SEAI).
Your solar panels could be a reality in just a year with income from the rent-a-room scheme. The panels will continue to add value to your home and reduce your energy costs, long after the tenant has moved out.
Make the savings count
If you can afford to, you could commit to saving the extra income from a housemate.
Share your space for three years for example and rent-a-room income of €700 a month would equate to €25,200 in savings.
Interest rates on savings aren’t great right now – lodge €700 a month into a Bank of Ireland SuperSaver regular savings account or an AIB Online Saver account, which both currently offer 3 per cent interest, and you’ll come out with your savings of €25,200, plus €273 in interest for your trouble, after deposit interest tax.
If you have short-term debt, like credit card debt, it would make more sense to clear this first before saving the money at a lower interest rate.
The important thing is to put the new income to the most constructive use rather than just spending it.
Pension plan
Some first-time buyers will have thrown everything at saving for a deposit to the detriment of their pension. Using income from renting a room to increase your pension contributions is a gift to your future self.
Maxing pension contributions, including additional voluntary contributions, from your income is the most tax-efficient way to add to your pot. But clearly that is dependent on your paying tax in the first place.
“The biggest incentive to pay into a pension is tax relief, but there is no tax relief on rent-a-room income because it’s tax-free money. So you wouldn’t be putting that money into your pension; your pension contributions should be paid out of money you would be paying tax on,” says Tobin.
“If you put €500 a month into your pension from earned income [from your job] for example, that would cost you €300, not €500 because of the tax relief,” he says, assuming you are paying tax at the 40 per cent rate.
“The €14,000 you can earn from renting a room, you’ve already got tax relief on that, so that’s for other things,” he says.
You could use it to backfill your coffers after you’ve maxed out your pension contributions from earned income.
