What is a Regulated Buy to Let Mortgage?
A regulated buy to let mortgage is required when a property is to be rented to an immediate family member. The term ‘regulated’ is used because a conventional buy to let mortgage is not regulated. If a buy to let property it to be occupied by a family member and the mortgage is regulated, it falls under stricter guidelines than a regular buy to let mortgage.
With the general rise in house prices making it more difficult for people across the board to get onto the housing ladder, there has been a rise in recent years of borrowers with greater resources acquiring properties for their immediate family members to live in and rent from them – maybe at a more favourable family rate.
If you need to take out a mortgage for a property that will be let to a family member, then the necessary Buy-to-Let mortgage falls within regulations set out by the Financial Conduct Authority (FCA), hence it is known as ‘regulated’, and a Regulated Buy-to-Let mortgage will be the most suitable loan for your situation.
The most frequent cases are parents buying houses or flats for their children to occupy, often while they are studying at university, but there are also many instances of people helping parents or grandparents with new homes as they move to be closer to family or downsize from a larger property once children have flown the nest. In other cases, it could be that an established landlord is simply allowing an immediate family member to rent from them out of convenience, or that you are buying a home for yourself and will let out rooms within it to family members.
Letting to family members can come with many upsides and is generally very convenient for all involved, but having immediate family as tenants does unfortunately sometimes carry its own risks. Problems can mainly stem from a lower rental yield due to a ‘family rate’, family members assuming that letting rules should be laxer in their case, being regularly late or defaulting on rent payments, or simple family politics.
Many lenders tend to avoid Regulated Buy-to-Let mortgages due to the added risks associated with them, so getting advice from an experienced mortgage broker at an early stage will help you find exactly the right lender and deal to suit your circumstances, saving you a lot of time and potentially money as well.
what is the difference between regulated and unregulated buy to let mortgages?
The simplest place to start with this is to clarify that a conventional Buy-to-Let mortgage is unregulated. This is a straightforward investment property loan where you are buying a property with the sole purpose of letting it out to private tenants, and not to any members of your immediate family or to move into the property yourself.
If you intend a close relative to reside at the property any time after purchase and pay rent to you, then your Buy-to-Let mortgage application will be processed as a regulated transaction. The term ‘close relative’ covers members of your immediate family – parents, grandparents, children, grandchildren, brothers and sisters – but not cousins, aunts, uncles or more distant relatives from your extended family. The decision on whether your mortgage is regulated or not will be made at the time of the application based entirely on your honest and open intentions for the property at that point.
If your needs or intentions for the property change while still mortgaged, for example, if you took out a Buy-to-Let mortgage but at some point choose to let out rooms or the whole property to an immediate family member, then you will need to discuss this with your lender in order to avoid being in breach of your lending agreement.
It’s worth noting that the mortgage will by default be a regulated transaction where the property was not purchased with the intention of it being Buy-to-Let – a normal residential mortgage is regulated by the FCA. The definition is based upon the owner or members of their immediate family being resident.
You may not need a Regulated Buy-to-Let mortgage if only a minority part of the property is being let to a family member. In the case of a House of Multiple Occupation (HMO) where immediate family members are only occupying less than 40% of the available rooms, then the lender is likely to accept that a standard Buy-to-Let mortgage is applicable. More on other criteria below.
what are the criteria for a regulated buy to let mortgage?
You’ll find that the general criteria for a Regulated Buy-to-Let mortgage is no different to that of a standard Unregulated Buy-to-Let – lenders will each have their own requirements when it comes to the loan-to-value value ratio, minimum deposit and the anticipated rental yield, with many having additional criteria related to your personal finances, credit rating and minimum personal income.
However, there are two main criteria for a Buy-to-Let mortgage application to be treated as a regulated loan:
- If it is your intention to live in the property yourself at any point in the future, thereby becoming an owner-occupier, the mortgage will be treated as regulated and must be administered in the same way as a residential loan. Although many people have moved into their Buy-to-Let properties following unexpected changes in their circumstances, as this was not their intention from the outset, they are not breaking any rules as long as their lender is informed and happy for them to do so.
- The second, and usually the primary reason for a Buy-to-Let mortgage to be treated as regulated, is when there is the intention that a close relative will occupy the property. A close relative is defined by the vertical family tree going upwards to parents and grandparents or downwards to children or grandchildren and also by horizontally to brothers and sisters.
As said before, if you have taken out an unregulated property investment mortgage on a Buy-to-Let home, but circumstances change and you and/or members of your immediate family come to live in the home (whether paying rent or not), then you must inform your lender.
This might necessitate you needing to remortgage your property to a regulated mortgage, which could in turn entail extra charges and fees. It might be possible to avoid or lessen these by switching to another lender. It’s best to seek advice from an experienced mortgage broker in these cases, to avoid wasting time and money. Get in touch with a member of our team to find out all your options.
can any relatives ever live in a regulated buy to let?
In theory yes, as the mortgage on the property is suitable for occupancy by anyone, but if they are not actual immediate family members then a Regulated Buy-to-Let mortgage is not necessary.
Regulated Buy-to-Let mortgages will only apply to occupation of the property by tenants who are immediate family members, and will not apply to aunts, uncles, cousins and more distant relatives.
The scenarios in which a Regulated Buy-to-Let mortgage will apply include:
- Children renting from parents
- Older relatives renting from their children or grandchildren
- Brothers or sisters renting from their siblings
If you let out the property to any family member that isn’t your direct sibling, parent, child or grandparent, then a conventional Buy-to-Let mortgage should be sufficient under the regulations. If a more distant relative moves into your Regulated Buy-to-Let property with your close family, or comes to live in your conventionally mortgaged residential property and pays you rent, then this should be acceptable, as the property is already regulated (you may only need to declare the additional income for personal tax purposes).
who can get a regulated buy to let mortgage?
Just as with a conventional ‘non-regulated’ Buy-to-Let mortgage – investing in property for the sole purpose of letting it out to tenants – anyone may be eligible to apply for a Regulated Buy-to-Let mortgage, subject to the usual lender requirements. In fact, it’s more likely that you will be required to obtain a regulated mortgage for compliance reasons rather than through choice, and the process may be more similar to that of a standard residential mortgage than a normal Buy-to-Let.
A provider will always have certain criteria around the proposed rental yield, valuation of the property, minimum deposit requirements and in some cases an assessment of your personal income and expenditure to establish affordability, as well as the customary credit check. If the lender is satisfied with all these aspects, then they will be highly likely to grant you the mortgage.
If you choose to let out a property to a family member and are using a mortgage to purchase the accommodation, then you will more than likely require a Regulated Buy-to-Let mortgage. Having family as tenants can have advantages, especially if you enjoy a good relationship and you can view the rent paid (and therefore that contribution towards the mortgage) as being a good way to keep wealth within the family. But it can also carry some risks, especially from the perspective of a mortgage lender looking to ensure security on the loan. Rental rates to family members are typically lower than usual, affecting the anticipated rental income and therefore the affordability of the loan, and family members may also be more likely to default on rent payments.
For this reason, simply because of the risks involved, the majority of lenders tend to avoid properties that are let to family members. This can make the process more frustrating when you need a mortgage in these circumstances, but it certainly isn’t impossible to find a lender and product to match your requirements. A detailed discussion with one of our experts will guide you through the process, which we are confident will result in a suitable recommendation.
how much deposit do I need for a regulated buy to let?
As the risks involved with a Regulated Buy-to-Let mortgage are greater than those for both a standard Buy-to-Let and a conventional residential mortgage, you will be expected to provide a higher-than-average deposit. The majority of lenders offering Regulated Buy-to-Let mortgages will require a deposit (or equivalent equity) of at least 25%, therefore lending up to 75% of the property’s value. For example, if buying a house for your son or daughter and some housemates to live in while at university with a value of £200,000, you will need to provide a deposit of £50,000.
However, every lender will have their own criteria for granting mortgages and approach to risk with this type of business, and deposit levels may vary. You might also find yourself asked to provide a larger deposit if you have any adverse credit events on your record.
In many instances, an mortgage broker such as ourselves, with good established relationships with a broad spectrum of lenders across the market, will be able to negotiate on your behalf to obtain a better deal on a normal Buy-to-Let mortgage. But because of the regulated status of this type of mortgage, lenders will have less room for flexibility on their terms and conditions, as they need to show due diligence in protecting their interests and those of the borrower. Neither party will gain if the borrower ends up with a mortgage they cannot afford.
While there may be a high minimum deposit requirement, there is no upper limit. As with any type of mortgage, supplying a larger deposit will result in a lower risk to the lender and therefore you should be able to access deals with lower rates of interest as well as greater flexibility on other terms, on a par with more conventional residential mortgages.
Can I change from a regulated to an unregulated buy to let mortgage?
If you already have a regulated buy to let mortgage and circumstances change resulting in the property no longer being occupied by a family member, there is no reason why a switch to a standard buy to let mortgage should not be considered. By changing to a standard buy to let from a regulated buy to let may be beneficial, opening up options for better rates of interest from a much wider marketplace. it may also be possible to increase the borrowing in order to release funds for other purposes, such as additional investment property purchase.
REGULATED BUY-TO-LET MORTGAGE WITH BAD CREDIT?
As with any kind of mortgage, if you unfortunately have instances of adverse credit on your records, then this can make obtaining a mortgage a little more difficult. Most mainstream lenders have very narrow criteria for lending, and many will decline applications from people with a poor credit history out of hand. In the case of a Regulated Buy-to-Let mortgage, it might be more difficult still, as your options for the number of lenders prepared to consider an application for this type of product will be further reduced when taken in combination with bad credit.
This said, while it will be more difficult, it is by no means impossible. A standard Buy-to-Let mortgage will not really be suitable for investors with poor credit, and it’s likely that you’ll need to approach one of the niche-market specialist lenders in the mortgage sector to obtain the product to suit your needs, depending on how severe your credit issues are. These specialist lenders will not simply look at a credit score or rule you out for historical events, but will take your wider circumstances into consideration, concentrate on your current financial status, conduct a reliable affordability assessment and consider your more recent credit history in order to make a decision.
When you have a record of poor or adverse credit and you’re looking for a Regulated Buy-to-Let mortgage for a property to be occupied by a family member, it can be very difficult to identify all your options. The specialist lenders operating in this field do not advertise their products publicly, always preferring to work through established intermediaries (such as ourselves here at Just Mortgage Brokers) to ensure that applicants are a good fit for their services and vice versa.
regulated buy to let mortgage rates
Sadly we are unable to give specific information on Regulated Buy-to-Let mortgage rates in this article – mainly because the Buy-to-Let mortgage market is constantly changing, with a variety of new lenders, new products and different approaches being introduced on a regular basis, with some deals also being withdrawn at very short notice as the landscape fluctuates.
You may be able to find a handful of Buy-to-Let products listed online by certain lenders, but, as a specialist area of borrowing, your options could be limited. This situation is exactly the same for the Regulated Buy-to-Let mortgage market, albeit on an even smaller scale because of the limited number of lenders offering these kinds of products, and searching for the right deal yourself may prove to give you frustratingly few options.
However, there might well be a number of mortgage deals and more competitive rates available only through specialist mortgage brokers working with smaller lending companies whose products don’t usually appear on the high street and who don’t deal directly with applicants. These lenders will have more flexible criteria, albeit within the regulated environment, and could deliver the most favourable mortgage to meet your needs.
To establish the most suitable lender and rates for your circumstances, speak to one of our experts today. They’ll go over all the details of your particular situation, conduct assessments that mirror those used by many lenders, and recommend the right options for you going forward. With access to over 12,000 mortgage products from around 90 lenders, occasionally on an exclusive basis, we’re confident we’ll find you the right deal.
Regulated mortgage LENDERS
With Regulated Buy-to-Let mortgages being quite a niche-market area of the mortgages sector, you will not find many options to choose from on the high street. As mentioned in previous sections, mainstream providers will tend to avoid family Buy-to-Let arrangements due to the complications and risks involved, and it’s highly likely that you’ll have to approach one of the smaller specialist mortgage lenders to find the most suitable scheme to meet your needs.
Specialist lenders rarely advertise their products online and only accept mortgage applications made through a trusted intermediary such as an established mortgage broker like ourselves. So, while a middle-man might be a necessity, it’s also a benefit – an assurance that you will receive the right advice for your circumstances, and likely save money in the long run.
Lenders come in all shapes and sizes, with differing specialisms or focuses for their business, according to which sector of the market they cater to. In order to establish which lender or product will be the right fit for your Regulated Buy-to-Let mortgage, it’s important that we have a full understanding of your current financial situation as well as your aims and objectives in relation to this specific transaction.
Specialist lenders will take into account a variety of factors before deciding whether to offer a mortgage. While a standard Buy-to-Let mortgage deal will focus more on the anticipated rental revenue from the property as a basis for the loan, in the case of a Regulated Buy-to-Let lenders will also want to carry out a personal income and expenditure analysis and take a detailed look at any existing Buy-to-Let property performance.
As each lender tends to apply some of their own specific and unique criteria to this kind of niche lending, which you may or may not meet according to your individual position, a detailed discussion with one of our expert advisers will quickly determine which lenders will be suitable for you to approach, saving you from possible disappointment.
Regulated mortgage advice
The highly specialist nature of Regulated Buy-to-Let mortgages and the comparatively small number of options available – and therefore the lack of competition within the market – means that getting the right advice has never been more important. With any area of lending that you won’t routinely find available on the high street, not only do you need expert advice to ensure you get the most favourable and suitable deal for your circumstances, but also to know for certain that a Regulated Buy-to-Let mortgage is the right scheme for your needs.
As well as to identify all the lenders who will be able to offer you a Regulated Buy-to-Let mortgage, and which will be most suited to your case, specialist advice is also essential in making sure your application is made in the correct way. Each lender has their own criteria and subtle differences during the assessment and application process, and a highly experienced adviser will know how to frame your application to give it the best possible chance of success.
At Just Mortgage Brokers we have a dedicated team of qualified advisers who between them have decades of experience under their belt. During this time, we’ve had first-hand involvement in most situations associated with getting a mortgage and have helped thousands of people in all kinds of circumstances to obtain the right home loan to meet their needs, whatever their personal requirements.
Talk to one of our team members at the earliest opportunity in order to establish the best way forward. Once a suitable solution has been agreed, we can guide you through the application process and will be on hand to help you negotiate every stage until you see success.
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
Your property may be repossessed if you do not keep up repayments on your mortgage.