When purchasing property, regardless of whether it is to be used as a dwelling or for commercial activity, one of the most important factors is securing a reliable form of finance. There is a wide range of options available to the prospective property buyer, each with its advantages and disadvantages.
Bridging finance, for example, excels at providing large sums of money at short notice, making it the ideal option for property developers at auction. On the other hand, mortgages are the go-to for prospective homeowners looking to move on or up the property ladder. However, although mortgages are so often used, it isn’t a one-size-fits-all solution. There are different kinds of mortgages, with some being regulated, and others not.
In this article, we will discuss regulated mortgages, what they are for, and when you might use one.
What is a regulated mortgage?
Simply put, a regulated mortgage is a type of mortgage that is subject to tighter regulations and restrictions than unregulated mortgages. Properties purchased with a regulated mortgage must be used as a dwelling, and have a more stringent application process. Regulated mortgages are usually given out for riskier uses than unregulated ones, so further measures must be taken to protect the lender.
Typically, regulated mortgages are required to purchase buy-to-let properties to rent them to immediate family. In practice, this refers to children, parents, and siblings, with extended family falling outside of this categorisation.
How much can be borrowed with a regulated mortgage?
Given the strict regulations, borrowing with a regulated mortgage can be much more restrictive than with other types of loans. With a regulated mortgage, your loan agreements will have less favourable terms, meaning higher costs for you and likely more limitations on how much you can borrow.
The main reason why regulated mortgages can be so restrictive is the occupant. For standard buy-to-let mortgages, one of the key factors that lenders consider is the property’s rental income. A high level of rental income from a property means a safer bet for the lender, and more favourable terms for the borrower. However, when a prospective property buyer intends to rent the property to a close family member, income isn’t typically the main priority. As such, the lender is forced to consider how repayments will be made, despite the lack of revenue from the property itself.
This typically means that lenders will pay closer attention to the personal income of the borrower. If the borrower has a substantial income stream, then they may well be able to obtain a regulated mortgage despite the lack of rental income. However, you may be out of luck if your annual earnings are low, with most lenders requiring a bare minimum income of £30,000 a year to be considered. However, the exact benchmark depends on your specific lender, with some requiring less and others more.
Can I get a regulated mortgage with a small deposit?
Although a standard mortgage lender might ask you for no more than a 20% deposit, this is less than the minimum for most regulated mortgages. Instead, you will typically be expected to provide at least a 25% deposit, with most lenders providing a maximum of 75% Loan To Value (LTV). Naturally, the specifics will depend on your particular lender, but suffice it to say, a regulated mortgage will be more restrictive than an unregulated one.
While regulated mortgages are quite different from unregulated mortgages in terms of Loan To Value and repayment terms, there are still some similarities. Most notably, regulated mortgages can be obtained with more favourable terms if you provide a more substantial deposit. If you can provide a hefty deposit, you’ll be able to reduce your interest rates dramatically, and potentially reduce other fees.
Renting a portion of a property to a family member
Although a regulated mortgage is required when renting a property to a family member, it can get a bit complicated when you only rent a portion, as opposed to the entire property. Depending on exactly how much of your property is rented to a family member, you may be able to apply for a standard mortgage, or a regulated buy-to-let mortgage.
When you make an application for a mortgage, your lender will consider your situation and your intended use for the property. They will then determine what kind of mortgage is appropriate for your situation. Generally, regulated mortgage lenders follow the guidelines that state any property with more than 40% occupancy requires a regulated mortgage. This means that, if the property you intend to purchase will fall under 40% occupancy, you can instead obtain a conventional mortgage. If you are unsure whether your chosen property satisfies this requirement, you should consult a professional for advice. Making the wrong choice can be costly in both time and money, so it’s best to err on the side of caution.
What happens if the family member moves out?
If your family moves out of your property while you have a regulated mortgage, you must first notify your lender of the change of circumstance. This shouldn’t have any consequences for you, unless you have delayed notifying your lender. Once your family member has officially moved out, you will then be able to switch from a regulated mortgage to a conventional mortgage, and enjoy the benefits of doing so. This includes better repayment terms, more flexibility in how you make repayments, and less strain on your finances.
Wrapping up
All in all, regulated mortgages are a niche but useful form of finance. If you intend to purchase property with a view to renting it to close relatives, make sure you check whether a regulated mortgage will be required. Most regulated mortgage lenders will assess your situation for suitability, but it is recommended to obtain the advice of a professional financial advisor for best results. By doing so, you will ensure you get the right mortgage for your situation, and protect yourself from any problems that can arise from choosing an incompatible solution.