If you plan to let a property to a family member, and will be using a mortgage to do it, chances are you will need a regulated buy-to-let mortgage. Family members renting from family members is not uncommon, and there are various advantages to this kind of arrangement. However, there are some risks, particularly from the point of view of the mortgage lender.
Most lenders will steer clear of arrangements where a property is rented to a family member as the risks are significant. If you plan to do this, you should be aware that it could be difficult to get a mortgage, but it’s absolutely possible.
Think Plutus has helped a number of borrowers secure a regulated buy-to-let mortgage. If you are wondering where to start, get in touch today and we’ll get the ball rolling.
What is a regulated buy-to-let mortgage?
Regulated buy-to-let mortgages are a specialist product for properties that are to be rented to members of the borrower’s family. The use of the word ‘regulated’ points to the fact that a conventional buy-to-let mortgage is not regulated, meaning it doesn’t have such stringent terms and requirements.
A regulated buy-to-let has tighter guidelines compared to a conventional one. The regulation comes from the Financial Conduct Authority (FCA) and there are more hoops for borrowers to jump through as opposed to a regular buy-to-let mortgage.
Be aware that a regulated buy-to-let is only applicable to arrangements with immediate family members. Cousins, aunties and uncles are not included in this. If the family member you are renting to isn’t a sibling, parent, grandparent or child, a normal or consumer buy-to-let mortgage should be all you need.
What deposit is needed for a regulated buy-to-let?
Most lenders will require a minimum 25% deposit and will lend no more than 75% LTV. There is some variation amongst lenders, but as the mortgage is regulated there is less room for flexibility. Where higher deposits are involved, you are likely to find the best mortgage deals. Lenders like to have more security on their loan, so they will lower the rates in accordance with larger deposits. For example, if you have a deposit of 40% and require only 60% LTV, you will probably find some very attractive rates become available.
How much can I borrow with a regulated buy-to-let?
The most favourable rates are not usually found on regulated buy-to-let mortgages. That means the amount you can borrow is also often affected. The market is very restricted, and the borrowers that are prepared to accommodate this type of mortgage may have their own conditions for doing so. In many cases, these conditions are usually quite rigid, but that doesn’t mean there aren’t good deals out there. The circumstances of borrowers are always different, and we’ve helped people secure some excellent buy-to-let deals.
The affordability assessments for regulated buy-to-let mortgages are very different from those in conventional buy-to-let mortgages. In a conventional application, the assessment is usually based on rental income as the primary method of making repayments. In a regulated buy-to-let mortgage, the calculations are largely based on the borrower’s income and affordability, and is treated as a residential second home mortgage, meaning rental income is not taken into account. This is because lenders need to be satisfied that the borrower can afford the mortgage payments in the event that the property stops yielding a rental income.
Lenders have their own lending guidelines that they must adhere to, and this means there is more flexibility with certain lenders. The more strict lenders will have requirements like borrowers earning a minimum of £30,000 per year to qualify for a regulated buy-to-let mortgage. Some lenders will not need you to earn quite so much, while others will insist that you earn even more. As a rough guide, you should expect lenders to lend a maximum of 3-4x your annual income. Although is will depend on your current mortgage or credit commitments.
What if I’m self-employed?
For self-employed borrowers, lenders will usually assess based on your net income rather than gross income or annual turnover. If you really need a regulated buy-to-let mortgage, you’ll need to speak to someone who specialises in this field. Going it alone could mean you waste time and money submitting applications to lenders who are not suitable for your needs. Speak to an adviser at Think Plutus and we can link you with the specialist lenders you will need.
What happens if my family member moves out?
If you have a regulated buy-to-let in place, but the family member you are lending to is moving on, it should be possible to transition to a conventional buy-to-let mortgage. Honesty is always the best policy with lenders and advisers regarding changes to the property you have a mortgage on. What’s more, there are likely to be some advantages to switching onto a standard buy-to-let from a regulated one. These advantages include:
- Better rates
- A smaller deposit, which can increase your equity
- More flexibility
- A wider range of lenders to consider
- Improved cash flow
The advisers at Think Plutus are on hand to assist if your family member is moving out of your rental property. Don’t just leave things as they are, as you would only be harming yourself by failing to disclose a change and missing out on possible improvements to your mortgage deal.
What if only part of my property is rented to a family member?
If it is only part of your property that is rented to a family member, it could be that a conventional buy-to-let mortgage will suffice. It will be down to lenders to assess whether or not a regulated buy-to-let mortgage is required, based on the percentage of the property that is/will be occupied by your family member(s). The majority of lenders will follow the guideline that anything over a 40% occupancy will necessitate a regulated mortgage. If the occupancy of family members takes up less than 40% of the total property, a standard buy-to-let mortgage should suffice.
One example where this might apply would be if you plan to rent out an HMO. If your family members only occupy one of the rooms in the property, this is likely to fall below the 40% guideline. You might also want to consider an HMO mortgage.
Specialists in regulated buy-to-let mortgages
A regulated buy-to-let mortgage is a more specialised and complex mortgage product. If you need to get one, you should give Think Plutus a call and speak to one of our experts. As regulated buy-to-let is a niche mortgage type, there will not be a wide range of lenders and products for you to choose from. By approaching Think Plutus, our advisers will be able to find the best deals available to you, including ones from specialist lenders who may not be accessible without the input of a specialist broker.
Think Plutus has access to the entire UK mortgage market, so you can rest assured our team will be able to find you the most viable mortgage possible. This will be entirely based on your own circumstances and it starts with you making contact and telling us about your situation and your needs.