Take in a lodger and keep the wolf from the door

Alistair Darling's announcement in last week's pre-Budget report that mortgage lenders should give three months' grace before starting repossession proceedings is undoubtedly welcome. But homeowners struggling with bills or worried about the prospect of unemployment will be exhausting a multitude of solutions before resorting to a political promise – one of which could be renting out a spare room.

Making otherwise unoccupied space in your home earn its keep is an option that more and more people are exploring, says Louisa Dreja at Abbey. "Many homeowners bought properties with a spare bedroom to give them the choice of renting it out, though they have never actually done it. But in today's economic climate, people are starting to take the plunge and realise the capital on this extra room."

According to recent research from the lender, the average monthly rent generated by a spare room is £289, equating to £3,468 a year. And, unlike a pay rise, the first £4,250 of each year's income is tax-free under the Government's rent-a-room scheme.

Finding a lodger is also easier than ever, with a plethora of flatmate websites that make matches from profiles – similar to online dating. EasyRoommate.com, which was launched in the UK in 2002, reports a 20 per cent increase in the number of users in the past year. This is among both homeowners and people looking for a room to rent, says business development manager Tamara Smith. "On one side of the fence you have the people who would be getting on the property ladder – perhaps even with a friend or sibling – but can no longer gain access to mortgage funding. On the other side, you have homeowners worried about the prospect of losing their jobs and wanting the security of extra income. After all, this could be the difference between staying in their home or having to move out."

Each party can view the profile of the other – complete with picture – although there will usually be a charge for making contact. At EasyRoommate.com, this starts at £14.90 for a five-day period.

But the website also hosts a free event called Flat Night Fever, at which prospective lodgers and landlords can meet. "It's like speed dating but to find your ideal housemate," says Ms Smith. "Many people also use it as a starting point – so five individuals meet for the first time and all rent a new property together." Currently Flat Night Fever is only held in London's Leicester Square, but there are plans to roll it out to other major cities. Further sites to explore are SpareRoom.co.uk, RoomBuddies.com and Gumtree.com.

But it's once you think you've found a match that the hard work really begins, as you will need to screen lodgers in the same way you would tenants, says Tom Entwistle, managing director at the information website LandlordZone.co.uk. "You should start with a detailed application form that you can download from the site. It asks some searching questions, including the applicant's previous addresses, current employer and any vehicle they will be keeping at the property. It also requires proof of identity from a passport or driving licence."

Once these checks are completed, Mr Entwistle recommends you carry out a credit search to ensure they are reliable payers. A comprehensive search, including references, is available from TenantVerify.co.uk at a cost of £30.55. A more basic service will cost £15.88 but in this case you will need to seek your own references, which should include a previous landlord and current employer, says Mr Entwistle. "The rent should then always be paid by standing order so it doesn't have to be discussed again."

Once the tenant has been accepted, it's a good idea to draw up a lodger agreement or house-share agreement, available online from LandlordZone or from the legal publisher Lawpack. This is slightly different to the assured shorthold tenancy agreement (Asta) used by buy-to-let landlords as it does not include security of tenure, meaning the lodger has no legal right to stay in your property. The law does state there should be a "reasonable notice period", usually interpreted as 30 days, but this is "entirely contractual", says Mr Entwistle. "In other words, so long as the stated period has been agreed by both parties, it won't be overruled."

However, notice periods can be a double-edged sword. For example, a month can be helpful should you be relying on your lodger's rent to meet the mortgage repayments. But it will still apply even if there is a severe clash of personalities. "Only if the situation becomes violent or illegal can you break the notice period – in which case you will simply have to call the police," says Mr Entwistle.

And should you become the best of friends with your lodger but find that you cannot service the mortgage repayments, even with the additional income, the stated notice period still applies. Even if you receive a repossession order, you will be given notice that can be passed on to your lodger. It is common practice to take a deposit from a lodger to protect against damage and breakages during the duration of their stay. "But as the agreement is not an Asta, it will not fall under the Tenancy Deposit Protection Scheme, which requires that a landlord's deposits are held in a government-backed scheme," says Malcolm Harrison at the Association of Residential Lettings Agents.

Homeowners should also tell their contents insurer if they are taking in a lodger. Andy Leadbetter, director of insurance at comparison site MoneySupermarket.com, says: "If you are coming to the end of your household policy, your insurer is likely to add on the lodger regardless. But when it comes to renewing the policy, you may find it results in an increase in your premiums."

Most insurance companies, including Virgin Money, draw the line at two lodgers. "Adding up to two more people to your home insurance is fine and, depending on circumstances, it may not even affect your premiums," says Virgin Money spokesman Scott Mowbray. "But we would not make an offer on more than this. Either way, full disclosure is crucial."

Tinu Ogundere, a 28-year-old healthcare manager, is looking for a lodger to ease the financial burden of her £185,000 two-bed flat in south London. She bought the home four months ago and although she can afford the mortgage, she admits she was caught out by the service charge.

"As soon as I moved, I had to renew the lease. I was already aware of this but I didn't know it would result in the service charge going up by more than £50 a month to £180. And the payments were backdated."

"It was always my intention to get a lodger but now it's a necessity. I am using websites like EasyRoommate.com but it's harder than I thought it would be. I think a lot of people are now looking for lodgers, so they have more places to choose from." Tinu has dropped the price of the room from £520 to £480 a month, including bills, but she is still taking care: "I am going to get an employer's reference as personal ones don't mean much. I will also draw up a contract and, ideally, ask their parents to act as guarantors for rental payments."