Buy-to-let mortgages have had their fair share of news coverage since the three percent stamp duty increase and cessation of tax relief in 2016. But for many, the opportunity to earn a monthly rental income and see the property’s value increase over time is tempting.
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 buy-to-let vs consumer buy-to-let, so that you know which one is right for you.
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 intention 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 20 per cent. Most applicants choose an interest-only mortgage, where they pay the interest but not the amount borrowed. 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 like that of a residential mortgage, 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 breakdown of some examples of an ‘accidental landlord’:
- Someone who goes travelling
- Inherited a relative’s property
- Moving elsewhere but not selling
- Moving in with a partner
Differences between a consumer buy-to-let and regular buy-to-let mortgage?
The key difference between a consumer buy-to-let mortgage and a regular buy-to-let mortgage is regulation. The consumer buy-to-let is supervised by the Financial Conduct Authority, which offers an additional layer of protection. This is particularly useful if you’ve unintentionally become a landlord and might need that extra security.
|Traditional Buy-to-let||Consumer Buy-to-let|
|Ideal for||Those intending to rent out a property, including established landlords||Landlords by circumstance and those letting to relatives|
|Regulatory body||Not governed by the FCA||Supervised by the FCA, similar to a home mortgage|
|Living requirement||No need to have resided in the property before applying||The property must have been a residence for you or a family member since its acquisition|
|Application strictness||More rigorous application requirements than traditional BTL|
Final thoughts: regular versus consumer
Having a clear understanding of consumer buy-to-let and regular buy-to-let mortgages provides more clarity about the best option for your needs. If you’ve become an ‘accidental’ landlord, it’s likely that a consumer buy-to-let mortgage is what you need, while anyone investing in a property with the aim of letting it out will qualify for a regular buy-to-let mortgage.