What is a regulated buy to let mortgage for family member?

Scratch the surface just a little and you will soon discover that there are very many different types of mortgages. Whatever your circumstances and whatever the purpose, there is likely to be a mortgage for you.

But beware that there are corners of the mortgage market where things can become more complicated than they might first appear.

One set of rules and definitions that might pose the kind of complications on which you might want to seek professional advice arises when you want to arrange a mortgage for the purchase of a property intended for letting to a family member – what is formally defined as a regulated buy to let mortgage.

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What is a regulated buy to let mortgage?

A regulated buy to let mortgage (also known as a family BTL mortgage) is specifically designed to provide funding in those situations where you want to purchase a home which you intend to let to tenants, including tenants who are close family members.

For example, a regulated buy to let mortgage might be required if:

  • you are the owner and landlord and want to let the property to your brother or sister;
  • you are the parents of a child to whom you want to let the property;
  • you want to let the property to your parents.

A regulated buy to let mortgage is necessary only when you intend to let the property to a close family member – such as a child, sibling, or parent. If you are letting the property to more distantly related family members – such as cousins, aunts and uncles or other relatives – the appropriate mortgage is typically the standard buy to let mortgage.

As an example: you are parents who buy a two-bedroom house in which a child of yours lives (while they are at university or taking up a new job, let’s say) while the second bedroom is let to another tenant. In this case you may typically require a regulated buy to let mortgage for a family member.

The distinction between a regulated and unregulated buy to let mortgage is important. If you are investing in a buy to let property with the help of a mortgage, you clearly need to recognise that distinction and secure the appropriate advance. It is especially important if your intention is to let the home, or part of it, to a close family member.

What’s the difference between a regulated buy to let mortgage and an unregulated BTL mortgage?

If you plan to invest in buy to let property, you are likely to approach your proposed business on the basis that any mortgage you arrange is free from the – generally quite strict – regulation of the Financial Conduct Authority (FCA).

That is because the FCA regards investment in buy to let property as an entirely business proposition – since you do not intend to live in the property yourself but simply collect rents from your tenants. Any buy to let mortgage you arrange for this purpose is an unregulated buy to let mortgage.

If close family members are going to be living in the property, however, the FCA regards it as almost a place of residence for the mortgage borrower rather than a purely business undertaking.

As the borrower’s residence, therefore, the property becomes subject to regulation by the FCA – and is subject to the stricter borrowing requirements reserved for a residence occupied by the borrower (in the same way as any other standard, residential mortgage). A regulated buy to let mortgage is required.

What about affordability for family buy-to-let mortgages?

If you are letting to a family member, your mortgage lender needs to know that fact and is likely to impose stricter lending criteria than would be the case for a standard buy to let mortgage.

That is because of the natural tendency for any borrower to treat tenants who are also close family members differently from other tenants. Typically, for example, you are likely to offer the accommodation at a cheaper rent if the tenants are close family and exercise greater flexibility in collecting the rent if they are experiencing financial difficulties or otherwise struggling.

In other words, most lenders will regard letting to a family member – by way of a regulated buy to let mortgage or so-called “family mortgage” – as a greater financial risk than a standard buy to let mortgage. The greater risk typically translates into a higher rate of interest.

For similar reasons, you are also likely to be asked for a bigger deposit to secure a regulated buy to let mortgage. The deposit may be as high as 25%, for example, and you might be restricted only to a repayment mortgage rather than the interest-only mortgages that are typically available to other buy to let landlords.

The underlying assumption on the part of the lender may be that you will need to make mortgage repayments without the benefit of an income from a full market rent.

Whereas an unregulated buy to let mortgage puts the emphasis very much on the rental income earned by the landlord (as the source of funds from which to repay the mortgage), a regulated buy to let mortgage or family mortgage may also look to the borrower’s other regular sources of income when it comes to assessing the affordability of any advance.

Next Steps

Mortgages come in all shapes and sizes – and it is critical that you arrange the mortgage that is suitable for the purposes you intend. If you are buying a property that you intend to let to a close family member, that mortgage is typically a regulated buy to let mortgage.

Regulated buy to let mortgages are subject to the stricter controls and lending standards of the Financial Conduct Authority (FCA) and you might want to draw on the advice of experienced mortgage brokers – such as us here at NeedingAdvice.co.uk – before making your investment.

FAQs-  Regulated Buy To Let Mortgage For Family Member

What is a regulated buy-to-let mortgage?

A regulated buy-to-lets mortgage allows the borrower to purchase the property to live in now or later with another tenant or to let the property out to family members. In this case, parents may use the house to rent out rooms to children who need accommodation until they finish school. Alternatively, if they wish to live in the house themselves but also let their spare rooms out to tenants, then they might choose to do this. Regulated BTL mortgages are subject to FCA regulation and therefore require appropriate protection. Close relatives include parents, grandparents, children and siblings. Aunts, uncles, and cousins are not considered close relatives, and therefore do not qualify for regulated BTL mortgages.

What’s the difference between regulated and unregulated?

Unregulated BTL mortgages allow borrowers to borrow against the value of the property to fund the purchase price. This means that the loan can be repaid using the rental income generated by the property. However, there are no restrictions on how the property can be used. For example, the property could be rented out to a friend or relative, or it could be left empty while the owner lives elsewhere.

In contrast, regulated BTL mortgages allow borrowers only to use the property for residential purposes. They cannot use the property for commercial purposes, such as letting it out as a hotel or restaurant, or converting it into flats. The property must remain a single residence.

Can I (or relatives) ever live in my unregulated property?

Buy-to-let mortgages are regulated by the Financial Conduct Authority (FCA). You could be breaking the terms if you plan on living there. Lenders won’t allow you to rent out your house if you’re going to become the owner-occupier.Regulated mortgages are better than unregulated ones because they offer lower interest rates and fewer hidden costs. Speak with a mortgage adviser to help you choose the right option.

What do I do if I or a family member moves out?

If you’re planning to move into a house with non-relatives, your lender may require you to disclose the names of those relatives who will be living there. You’ll also need to tell them about any changes to your financial situation, such as refinancing.

Can I sell the property to my family?

Selling a home to your family isn’t always possible. If you have other options to raise funds, then you should consider these first. Your lender may ask you to provide proof of income and savings. It’s important to remember that you’ll still need to pay off the existing mortgage before selling the property.

You may be able to get a larger mortgage when you’ve sold the property to your family. But don’t forget that you’ll need to repay the full amount at once, so make sure you have enough cash available.

You may want to think about getting a second mortgage from a different bank. This is known as a ‘family loan’ and usually comes with more favourable terms.

What do I do if I or a family member moves out?

You should always tell the truth about who lives in your home. This includes any renters living there. Your lender will want to see proof of your rental agreement, as well as copies of utility bills such as water, gas, electricity, cable TV, phone, etc.

It’s important to keep all documents relating to the property safe. Make sure you store them somewhere secure, like a fireproof box. Keep copies of everything, including any letters or emails you receive from your lender.

Your lender will probably want to know where you intend to live next. If you haven’t moved yet, you might need to show them evidence that you have sufficient money saved up to cover the cost of moving.

Your lender may also ask you to provide proof that you have enough money to pay for any repairs needed after you move in.

When you start paying back your new mortgage, you’ll need to contact your old lender. Tell them what happened and how much you owe. Ask them to send you an official letter confirming this information.

Can I get a residential mortgage on a buy-to-let property?

Yes, it’s possible to take out a buy-to-rent mortgage. However, lenders will only lend against properties that are being rented out.

Buy-to-let mortgages can be good investment opportunities but they come with risks. For example, you may not be able to get a mortgage if you’re planning on buying another property soon.

Buy-to-let mortgages aren’t suitable for everyone. Before taking one out, speak with a mortgage adviser to find out whether it’s right for you.

How long does it take to apply for a buy-to-lease mortgage?

If you’re applying for a buy-to lease mortgage, you’ll need time to save up a deposit. The minimum deposit required varies depending on which type of mortgage you choose.

If you’re looking for a mortgage with no upfront fees, you’ll need to put down a bigger deposit. A typical deposit for a buy-to-let mortgage is £5,000.

Can I get a regulated buy-to-let mortgage with poor credit?

You can get a mortgage even if your credit score is low. However, you need to be careful because there are many factors that affect the loan approval process. Lenders may require a large deposit, and they may also want to see how long you’ve been paying your bills on time. Bear in mind that not all creditors will go to the same sources to assess your creditworthiness. Some lenders may only use one agency, while others may use two or even all three. For example, if you defaulted a previous mortgage payment on an unsecured loan four years ago, that only appears on your call credit report, you could contact a lender who only works with Experian and Equifax but not Callcredit.

How to get a family buy-to-let mortgage?

A family buy-to-let mortgage is available through some banks and building societies. It allows you to borrow more than just yourself.

For example, you could take out a mortgage for both you and your partner. Or you could take out a joint mortgage for your children.

The amount you can borrow depends on the size of your home. You can usually borrow between 80% and 100% of the value of the house.

Lenders will typically ask for a larger deposit when you’re borrowing for multiple people. This means that you’ll need to save more money before you can get started.

It’s important to remember that a buy-to-let mortgage isn’t as safe as other types of mortgage. If you do decide to take one out, make sure you have enough savings to cover any potential costs. You can also contact a known market mortgage broker.