Understanding mortgages: buy-to-let vs consumer BTL

Posted by Chris Ledger, June 21, 2019

Understanding mortgages: buy-to-let vs consumer BTL

Buy-to-let mortgages have had their fair share of news coverage since the three percent stamp duty increase and cessation of tax relief. But for the savvy buyer, a buy-to-let mortgage still presents itself as an opportunity for a shrewd investment that will grow in value while achieving regular rental income.

Whether you’re a buy-to-let veteran or investing for the first time, navigating the always-changing world of mortgages can prove to be tricky. In this guide, we explain the difference between the two buy-to-let mortgage types: buy-to-let and consumer buy-to-let, so that you know which one is right for you.

So, have a gander, and become a mortgage whizz.

What is a buy-to-let mortgage?

Just in case you were wondering, the word ‘buy-to-let’ is a British phrase that refers to a property bought explicitly with the intentions of being rented out. The loan is provided under the condition that the applicant lets the property.

Buy-to-let mortgages work differently from residential ones. While residential mortgages focus on the applicant’s earnings, buy-to-let mortgages depend on how much the property achieves from rent.

The minimum deposit for a buy-to-let is often around 25 percent. Most applicants choose an interest-only mortgage, where they pay the interest monthly.  Only paying the interest in this way means a lower monthly repayment, which equates to more rental income.

It’s important to note at the end of your mortgage term, you will still owe the full outstanding capital balance, irrespective of the interest you will have paid off up until that point.

If you are buying, instead of owning the property outright, a buy-to let mortgage would be the only option available to you.

What is a consumer buy-to-let mortgage?

Buy-to-let mortgages are standard with landlords looking to purchase a rental property or build on their portfolio. But not everyone who becomes a landlord sets out with the intention to do so. This is where consumer buy-to-let mortgages come in.

Consumer buy-to-let mortgages are regulated as residential mortgages, aimed at ‘accidental landlords’ and non-professional landlords. They offer protection to people renting out their homes, but not as a business or investment.

In 2016, The Mortgage Credit Directive introduced a legislative framework to regulate the mortgage market. Consumer buy-to-let mortgages were part of this new change and offered consumer protection to individual landlords.

Consumer buy-to-let mortgages are regulated by the Financial Conduct Authority (FCA) in the same way as residential mortgages. The real reason for their existence is to offer additional protection to customers who find themselves running a property for income, by providing them with the same insurances all FCA regulated mortgages cover.

What is an ‘accidental’ landlord?

The term ‘accidental landlord’ is relatively common in the lettings industry. It is someone who didn’t buy a property to let it out, but circumstances meant they ended up becoming a landlord. Those circumstances vary.

Someone may own their home but get a job offer abroad and not want to sell. They also might not like the idea of leaving the property empty for an extended period of time. In such a case, the best route is to rent it out.

Alternatively, someone might inherit a property and decide that letting it yields the best results financially. They might even wish to remortgage and borrow extra capital against it, so they have more funds in the bank.

A full breakdown of what classifies as an ‘accidental landlord’:

  • Someone who goes travelling
  • Inherited a relative’s property
  • Moving elsewhere but not selling
  • Moving in with a partner

Which buy-to-let mortgage suits my needs?

If you have decided to buy a property to rent it out, you will need to go for a buy-to-let mortgage. In fact, you aren’t even allowed to get a consumer buy-to-let mortgage if you’re buying a new property or are a professional landlord.

Consumer buy-to-let’s were set up solely for accidental landlords. To qualify for a consumer buy-to-let mortgage, you need to let the property, but it’s not your main job, have previously lived in the property, or it’s the sole property that you rent out.

The strict lending criteria means that consumer buy-to-let mortgages aren’t as well known as regular buy-to-let’s. However, if you suddenly find yourself as a landlord, a consumer buy-to-let can act as a good alternative to regular buy-to-let.

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