Mortgages designed for landlords (buy-to-let mortgages) are not the same as mortgages designed for home-owners (residential mortgages). If you are taking out a buy-to-let mortgage, there are some important differences that you should know.
What's the difference between a residential mortgage and a buy-to-let mortgage?
Because residential mortgages are designed for home-owners, they come with regulatory protections designed to minimise the risks of people losing their home.
This means that everything, from how mortgages are sold right through to the worst case scenario of repossession, are strictly controlled by a set of rules which all mortgage lenders must follow.
Buy-to-let mortgages are considered to be a business transaction. Because the property will not be the borrower's home, buy-to-let mortgages are not regulated by the Financial Conduct Authority and the rules that apply to residential mortgages do not apply to buy-to-let lending.
How does this affect buy-to-let mortgage products?
Affordability is calculated differently. On a buy-to-let mortgage, the amount a lender will be willing to lend will be based primarily on the rental income that the property will be able to achieve from tenants paying rent.
Another notable difference is that buy-to-let mortgages will nearly always be operated on an interest-only basis. This is because most landlords will be expecting to sell the property eventually as their repayment strategy. As landlords, they are likely to be most interested in cash-flow considerations that enable them to gain a regular income stream from the property.
What if I want to convert my existing residential mortgage to buy-to-let?
If you have an existing residential mortgage and you plan to move home and rent out your property, you must contact your lender to discuss your plans before going ahead. You could be in breach of your mortgage contract if you do not. It is also extremely likely that you may invalidate or compromise your home insurance if you do not disclose the change of status of the property.
Lenders are used to receiving requests to allow a temporary period of letting, commonly called "consent to let", and it is often a straightforward process. For a permanent change of status to buy-to-let, you will need to consider what type of buy-to-let mortgage best meets your needs, and depending on whether your existing lender offers a suitable mortgage for you, you may choose to remortgage to a different lender on a buy-to-let basis.
What if I have a buy-to-let property that I subsequently decide to live in?
Similarly, you must discuss your plans with your lender if you decide you want to live in a property that you originally bought as a buy-to-let landlord to let to tenants. You could be in breach of contract with your lender if you do not discuss such an important change first.
What else should I think about?
If you are considering taking out a buy-to-let mortgage, particularly if you are an inexperienced landlord, you need to understand the responsibilities that you have as a landlord, as well as the requirements that a lender will have of you. For further information, see the National Landlords Association website.
You can see the general principles that CML members who offer buy-to-let mortgages adhere to in our Buy-to-let statement of practice.