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HomeBuy to LetRegulated buy-to-let mortgages

Regulated buy-to-let mortgages

Last updated on 14th September 2023 by Martin Alexander

If you wish to rent a mortgaged property to a family member, you’ll more than likely require a regulated buy-to-let mortgage. It’s not uncommon for family members to rent from other family members as it can have advantages. That being said, it can also carry some risks, especially from a mortgage lender’s perspective.

The majority of lenders tend to avoid properties rented to family members because of the risks involved. Finding a mortgage in these circumstances can be difficult, but it certainly isn’t impossible. It’s crucial you get the right advice before making any commitments, as applying for an unsuitable mortgage could result in your application being declined.

What is a regulated buy-to-let mortgage?

A regulated buy-to-let mortgage is used when renting a property to an immediate family member. The term ‘regulated’ is used because conventional buy-to-let mortgages aren’t regulated.

If a buy-to-let mortgage is regulated, it falls under tighter guidelines than a standard buy-to-let. The FCA regulates regulated buy-to-let mortgages. As a result, the application process will be strict compared to a conventional buy-to-let mortgage.

Common examples of regulated buy-to-let include:

  • A landlord is renting a property to a sibling
  • Parents are renting a property to their child
  • A landlord is renting a property to parents
  • Grandparents renting from their sons/daughters

It’s important to note that regulated buy-to-let only applies to immediate family and does not apply to cousins, relatives, uncles and aunties. If you rent to a cousin or relative or any family member who isn’t your direct sibling, parent, child or grandparent, then a conventional buy-to-let mortgage should be sufficient.

How much deposit will I need for a regulated buy to let?

Most lenders will require at least a 25% deposit and will only lend up to 75% LTV. That said, lenders will have less flexibility due to the regulation involved.

The best mortgage deals are typically available when higher deposits are used. This is because lenders have more security on their loans and can lower their mortgage rates accordingly. You should be eligible for headline rates if you have a 40% deposit and only need a 60% mortgage.

How much can I borrow with a regulated buy-to-let?

Regulated buy-to-let mortgages tend not to have the most favourable rates, affecting the amount you can borrow.

In an already restricted market, the lenders prepared to offer you a mortgage may only do so on their terms. Unfortunately, these terms can often be rigid, but that’s not to say you can’t still get a great deal. Each borrower has different circumstances, and we’ve secured some great regulated buy-to-let deals in the past.

Regulated buy-to-let mortgages are assessed completely differently from conventional buy-to-let mortgages. Conventional buy-to-let is typically assessed on the rental income of the property rather than the applicant. Regulated buy-to-let is calculated mainly on the income and affordability of the borrower. This is because lenders want to be satisfied that the borrower can repay the mortgage, even if the property isn’t generating a rental income.

Lenders adhere to their unique lending guidelines, so some lenders are more flexible than others. That said, some lenders require borrowers to earn at least £30k per annum to be approved for a regulated buy-to-let mortgage.

Some lenders don’t require you to earn this much, but others require you to earn even more. Maximum mortgage amounts are typically calculated at around 3-4x your annual income.

How is my income calculated if I’m self-employed?

If you’re self-employed, lenders will assess your net income, not your gross income or turnover. If you do need a regulated buy to let mortgage, then do speak to a specialist in this field.

You could waste a lot of time, money and effort applying to lenders that just aren’t suitable. Several high street lenders don’t offer regulated buy-to-let deals.

What if my family member moves out?

If you have a regulated buy-to-let and your family member is moving out, you can switch to a standard buy-to-let mortgage. Always be honest with your lender and advisor about any changes to the property while you have a mortgage. Furthermore, switching to a standard buy-to-let from a regulated buy-to-let can have advantages.

What’s the difference between regulated and unregulated buy-to-let?

Conventional buy-to-let or ‘unregulated’ buy-to-let is where landlords rent to non-family members.

In comparison, traditional buy-to-let may allow:

  • Better mortgage rates
  • Less deposit, which can mean an increase in equity
  • Greater flexibility
  • More lenders to choose from
  • Increased cash flow

What if part of my property is rented to a family member?

A standard buy-to-let mortgage may be sufficient if your property is only partly let to a family member. Lenders will calculate whether or not you need a regulated buy to let. The calculation is based on a percentage of how much of the property is rented.

For instance, many lenders follow guidelines suggesting anything over 40% occupancy would require a regulated mortgage. Anything less than a 40% occupancy should be granted with a traditional buy-to-let mortgage. An example of this would be if you had an HMO or multi-let property.

If your family member only occupies a room within the property, you could qualify for a standard buy-to-let. You may also qualify for an HMO mortgage.

Speak to an expert

You can speak to one of our experts if you require a regulated buy-to-let mortgage, as it’s considered a niche mortgage type. For this reason, there isn’t a wide variety of lenders and deals to choose from. Nonetheless, our advisors specialise in this area and have access to exclusive deals.

About the author

Martin Alexander
Senior Mortgage Advisor

Martin is a senior mortgage advisor who has held a CeMAP qualification for over 15 years while completing an MBA in Global Banking and Finance.