What is a Regulated Buy-to-Let Mortgage?

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.

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).

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.

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.

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.

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.