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Regulated Buy to Let Mortgages
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If you’re looking to rent your property out to a family member and have been declined for a mortgage, carry on reading below.
“I have a buy to let property, can I let that out to a family member?"
Short answer, yes! Most buy to let (BTL) lenders don’t offer this type of mortgage but there certainly are lenders out there who do. Letting a property to a relative is known as a “regulated” buy to let, as the regulation of the type of finance is deemed to fall under FCA jurisdiction and therefore warrants the appropriate protection that comes with it.
What is a regulated buy to let?
The definition of a regulated BTL is renting out the BTL property to an immediate family member. A common example of this would be: Child goes to a new city for University so parents purchase a property for them to live in with friends, with a view of then renting the property out to a non-family member as a future investment thereafter.
What do lenders think?
A lot of lenders don’t offer regulated buy to let mortgages for family members (in 2018) for various reasons, and as a result your options as a borrower can be limited. We have pulled together some information about lending policy to help you define if your buy to let mortgage needs to be regulated, and what to do about it…
Which family members would make my buy to let mortgage regulated?
In order for lenders to consider the buy to let mortgage as being regulated, the family member tenant must be a direct relative. This is immediate family only, so includes:
- buy to let mortgages for parents
- buy to let mortgages for grandparents
- buy to let mortgages for children
- buy to let mortgages for brothers and sisters
If you are renting a buy to let to relatives who are aunts, uncles, cousins or any other extended family, then standard buy to let policy applies.
What % of the property is let to a relative?
A key piece of criteria when establishing if your BTL mortgage should be regulated or not, is the actual % area of property that will be occupied by a family member. Most lender definitions state that buy to let family mortgages are restricted to 40% of the use of the property, so if a family member occupies less than this, it would be considered a standard BTL, and not regulated. Most standard properties will be fully occupied by the tenant and therefore classed as regulated, but there are certain arrangements where this may not be the case. For example, with Houses of Multiple Occupants (HMO's), where the family member is renting one room in a larger dwelling, on a separate tenancy agreement.
“Can you rent to a family member under an existing buy to let mortgage?”
Technically if a property with a non-regulated buy to let mortgage is rented to a family member, it should become regulated and therefore your mortgage lender would want to know. Whether the owner decides to tell the lender is another matter. The issue would certainly come to light for those at the point of remortgage, as any new lender will ask the question of who the tenants of the property are, and the borrower would be required to answer questions truthfully about their status as a relative – at this point it would be necessary to find a lender who offers regulated buy to let mortgages.
What to do when family member moves out?
If you are letting a property to a family member and they move out with non-relative tenants moving in, then again technically your lender would want to know about this, and if you come to refinance you’ll need to answer questions about the new or current tenants truthfully. At this point you would likely need to refinance onto a standard BTL mortgage.
If the current family member tenant wants to buy the property from you then they would simply apply for a mortgage themselves in the normal way. It is possible for you to offer a discount on the purchase price if you wish (a concessionary purchase), and some lenders would consider using the discount toward their deposit, meaning that they can potentially borrow without putting as much (or indeed any with some lenders) of their own cash in to do so.
How much can I borrow on a regulated buy to let / family buy to let?
If you are letting a house to a family member, you may be restricted on affordability when compared to a standard buy to let mortgage.
Lenders usually calculate affordability for regulated buy to let mortgages in a different way, and require the borrower to evidence they can afford the mortgage from their personal income, not unlike standard buy to lets based, do not include any rental income from the property.
Some lenders also require a minimum personal income threshold to be exceeded, which can be up to and over £30k (some lenders less than this, some more).
Typically, the loan is assessed as though it were a main residential mortgage, so affordability models / income multiple limits will apply – the average borrower can obtain around 4x income, but some lenders will consider more than this, up to 5x in certain scenarios.
Personal income is usually assessed by your gross annual income if you’re employed, taken from payslips/ a contract. If you are self-employed and want a regulated buy to let then lenders will consider any one of your share of net profits / salary / dividends if self-employed. Every lender is different in their requirements so it’s important to find one that fits your circumstances, hence why speaking to an expert is crucial. Some lenders for instance, will not lend if you have been in a job for less than 12 months, or self-employed under 3 years, where there are others happy to accept this.
What deposit / equity will I need for a regulated BTL mortgage?
This can be a tricky one as each lender has different rules and different criteria for buy to lets and for regulated buy to lets!
Standard BTL mortgages can be obtained up to a maximum Loan to Value (LTV) ratio of 85%, but with fewer lenders offering buy to let mortgages for family members, there are fewer options available, and as a result, most lenders in the space will lend up to a maximum of 75% LTV, so require a 25% deposit.
Can I get a regulated buy to let with poor credit history?
If you’ve had credit issues in the past then you may find getting a mortgage in general, pretty difficult. Add to this the fact you need a buy to let mortgage for family members, and the number of options you have will be considerably limited. That said, there are lenders who cater for both, depending on the type of credit issue (late payment, default, CCJ, Debt management plan, IVA, bankruptcy, repossession), the date the issue was registered (older the better), and the severity of the issue (size of the debt on the defaulted account, or the number of late payments). Usually the more deposit you have the better, so don’t be put off if you think you may not qualify – we will refer you to one of the experts that handles these issues on a daily basis.
It all depends on your credit file, some lenders may credit score, some lenders may go from the registration date of your bad credit history, some lenders may accept some light adverse registered historically so it’ll be key that the specialist we work with review a copy of your credit reports so they can review the whole of the market for you to see exactly where you stand in the current market.
You can gain access to your credit reports for free using free trials with any of the reference agencies, see here
Can I let my property type to family members?
The type of the property can have an impact on which lenders will consider the application for a regulated buy to let mortgage. Certain lenders don’t like properties that are Ex-local authority (especially flats), others don’t like leasehold property, and others refuse to lend on Houses of Multiple Occupancy (HMO). Listed buildings and thatched roofs also cause issue with some lenders, as do concrete built properties and others that are non-standard construction.
As this is case-by-case it’s something to bring to the attention of your advisor who can find a lender most likely to approve the property you own.
Who are the regulated buy to let mortgage providers?
There can be more restrictions with some of the regulated Buy to let lenders that consider such mortgages, as not many providers are willing to tackle the additional complications of offering regulated products. For this reason, there is less competition and availability of these types of mortgage.
There are various lenders that in the past have offered regulated mortgages (e.g. BM Solutions family buy to let) that no longer accept applications, and others that continue to do so, as well as more specialist lenders and smaller building societies who are key players and do a lot of business in this space.
To get an idea of where you stand in the current market and establish who offers regulated buy to let mortgages that suit your circumstances, get in touch and speak with the regulated buy to let specialist so you know what options may be available to you today.
The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.
Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage.
Buy To Let Mortgage Information
Looking for specialist advice? Read through our articles about different types of buy to let situations, and how best to prepare yourself to find the right mortgage for you