Regulated Buy-to-Let Mortgages: What You Need to Know

If you’re looking into property investment in the UK, buy-to-let mortgages might be on your radar. 

These are loans designed for properties you plan to rent out. But there’s a special type, called regulated buy-to-let mortgages, that’s unique to the UK market. 

Let’s get into what makes them stand out.

What Are Regulated Buy-To-Let Mortgages?

Regulated buy-to-let mortgages are specialised mortgages for situations where you’re buying a property to rent out to close family members, like parents, children, siblings, or grandparents. 

The key term here is ‘regulated’ which means these mortgages follow stricter guidelines set by the Financial Conduct Authority (FCA) compared to regular buy-to-let mortgages.

This type of mortgage is suitable in the following scenarios:

• You’re buying a home to have your parents or grandparents as tenants.
• You’re considering a property where you’ll also reside, perhaps renting out part of it.
• You want to buy a second home that you plan to let out to your children while they’re in university.
• When you’re looking for stronger consumer protections in a rental agreement with your family.

Who Can Rent In A Regulated Buy-To-Let?

In a regulated buy-to-let property, tenants can only be immediate family members of the borrower. This means close relatives like children, parents, siblings, and grandparents.

Anyone outside this circle cannot rent a property with a regulated buy-to-let mortgage. This includes:

• Distant relatives: Cousins, aunts, uncles, nieces, nephews, etc.
• Friends
• Unrelated individuals

The reason for this restriction is that a regulated buy-to-let is treated more like a residential mortgage due to the close family connection.

The FCA regulates it to ensure similar consumer protections for the borrower as with a standard mortgage. 

If you plan to rent to someone outside your immediate family, a standard buy-to-let mortgage would be more appropriate.

How Lenders Assess Affordability For Regulated Buy-To-Let Mortgages?

Similar to residential mortgages, regulated buy-to-let mortgage lenders primarily focus on your income and ability to repay the mortgage, even if the property is vacant.

This differs from regular buy-to-let mortgages where rental income is the main focus. 

Here’s an overview of what lenders look for:

• An occupancy rate of more than 40% of the property will be occupied by family members.
• Your rental income should cover at least 125% of your mortgage repayments.
• A minimum deposit typically around 25%
• Some lenders may assess your personal finances to ensure you can afford the mortgage.
• A good credit history

If you’re self-employed, the same criteria will apply, but be prepared to show extra proof of income stability.

How Much Can I Borrow for a Buy-to-Let Mortgage?

Regulated buy-to-let mortgages may have stricter Loan-to-Value (LTV) limits, meaning you might need a bigger deposit compared to a standard buy-to-let. 

Additionally, favourable interest rates are less common with regulated products.

The amount you can borrow can vary depending on the lender’s criteria.  Some lenders may require a minimum income (e.g., £30,000) and only lend 3-4 times your annual income, although this can change based on your existing debts. 

Talking to a mortgage advisor is key to understanding your borrowing options for a regulated buy-to-let mortgage.

Will I Need A Deposit?

Yes, you’ll typically need a deposit for a regulated buy-to-let mortgage. 

Most lenders require a minimum of 25% deposit, meaning you borrow no more than 75% of the property value (LTV).

There’s some variation, but with regulated mortgages, there’s less wiggle room.  A bigger deposit unlocks better interest rates and deals. 

Just like with a regular mortgage, lenders favour larger deposits for added security. So, saving a bigger deposit upfront can significantly reduce your interest rate in the long run.

What Happens If My Rental Situation Changes?

Life can be unpredictable, and your buy-to-let situation might change too. 

If, for example, your family member moves out, you may want to consider switching from a regulated buy-to-let mortgage to a standard one. Transitions might be complex, but you might get more benefits such as:

• Better interest rates that save you money in the long run.
• A smaller deposit
• More flexibility with the property, such as renting it out to non-family members.
• A wider range of lenders to choose from, potentially leading to a better deal.
• Improved cash flow due to potentially lower mortgage repayments.

Note though that, there can be fees involved, so it’s wise to check the terms of your current mortgage beforehand.

Additionally, always inform your lender or mortgage advisor about any changes to your property. 

Consider seeking advice from a mortgage advisor who understands the process, costs, and whether switching to a standard buy-to-let mortgage is the right decision for you.

What If I Only Want To Rent Part of The Property To a Family Member?  

In some cases, a standard buy-to-let mortgage might be sufficient, depending on the occupancy percentage. Most lenders use a 40% rule:

• If more than 40% of the property is occupied by family members, a regulated buy-to-let mortgage is likely required.
• If less than 40% is occupied by family (e.g., one room in a House in Multiple Occupation (HMO)), a standard buy-to-let mortgage might be an option.

Choosing the Right Lender for Your Buy-to-Let Mortgage

Finding the right buy-to-let mortgage provider is key. There are only a few lenders offering regulated buy-to-let mortgages in the UK. This includes:

• Mansfield Building Society
• Family Building Society
• The Loughborough Building Society
• Leek Building Society
• Virgin Money
• Together
• Saffron for Intermediaries
• Bluestone Mortgages
• Vernon Building Society

While this is not a complete list, it serves as a guide about your options. 

But remember, regulated buy-to-let mortgages are a niche product, it’s best to get help from a mortgage broker. They can search the market for you and find deals you won’t find by yourself.

The Benefits and Drawbacks of Regulated Buy-to-Let Mortgages

Regulated buy-to-let mortgages offer some unique advantages, but there are also potential drawbacks to consider. Let’s explore both sides of the coin to help you decide if it’s the right option for you.

Benefits

• If you’re renting to a family, this type of mortgage keeps things straightforward and above board, providing peace of mind.
• Setting clear financial boundaries with family rentals avoids potential misunderstandings, making relationship clarity a key advantage.
• You’ll have more consumer rights and protections, similar to residential mortgages, adding another layer of security.
• Some lenders offer products tailored to regulated buy to let, potentially including more favourable terms for family arrangements.

Drawbacks

• Be prepared for higher costs. The added protection and regulation can mean higher interest rates or fees.
• The eligibility criteria can be stricter. You’ll need to tick all the boxes in terms of income, deposit, and the property itself.
• Flexibility might be limited. With strict rules to follow, you might find there’s less wiggle room for your specific circumstances.
• Your choices could be limited as not all lenders offer these mortgages.
• The process to get the mortgage might take longer and be a bit more complex.
• If things change – like who you’re renting to – you might need a new mortgage, which could mean more hassle and costs.

The Bottom Line

Getting the right buy-to-let mortgage is crucial, especially when a family is involved. Understanding the rules and regulations can save you a lot of hassle. 

If you’re thinking about a property for close relatives, a regulated buy-to-let mortgage might be your best bet. But, with all the rules, it can get a bit tricky.

That’s why we highly suggest talking to an expert. 

A mortgage advisor with a deep understanding of regulated buy-to-let mortgages can be a game-changer. 

They’ll walk you through the whole process, make sure you know what you’re signing up for, and help you snag the best deal for your needs.

If you’re ready to take the next step, drop us a line. We’ll connect you with a knowledgeable mortgage advisor who specialises in regulated buy-to-let mortgages.