In November of last year we extended our lending criteria to include regulated buy-to-let applications. Since then we have been receiving increasing enquiries and I thought it would be useful to share more information on this growing segment of the market.
What is a Regulated Buy To Let mortgage?
Let’s start with some definitions.
Unregulated Buy To Let – also known as an investment property loan, is a mortgage available to landlords who are buying a property with the intention of renting it out. As the name suggests, these mortgages are not regulated by the Financial Conduct Authority.
Regulated Buy To Let – also known as family buy to let. This type of mortgage has a fairly narrow definition; a property that you will occupy either now or in the future, will be let to a family member, or where up to 40% is occupied by the owner with the remainder let.
We extended our lending criteria last year and we now accept applications from:
- Parents buying rental property which will be occupied by their children or grandchildren (including student housing for up to two additional tenants).
- People buying property to let to close relatives (that is parents, grandparents, children, grandchildren, brothers or sisters).
- Expat borrowers living abroad in a non-EEA country, who want to purchase rental property in the UK, which they will eventually occupy when they return home.
Is the Regulated Buy To Let market growing?
It is very difficult to find figures relating to the rates of growth or decline in this niche sector. However, we have noticed that we get a number of enquiries from brokers and parents who want to know more about purchasing properties for children going to university. In The Times Education Supplement (1 December 2017) they estimated that at the end of a typical three-year undergraduate degree, the expected total cost of accommodation is £14,6251.
It’s easy to see why some parents and grandparents are considering alternative options when it comes to funding their child’s education. Rather than paying rent, which will yield no return, investing in bricks and mortar offers much more potential, as well as providing a roof over their offspring’s head.
Why use Saffron?
Many lenders do not provide a Regulated Buy To Let mortgage. Essentially, buy to let mortgages are put in place to help a business venture, individual or company to borrow money to purchase an income-generating asset which could yield a long-term capital return. Mortgage lenders need to be sure that the venture is being run on a commercial basis.
However, there is a blurring of boundaries between residential and buy to let mortgages when families and overseas residents are involved. Some lenders compare this added complexity with the level of demand for regulated products, and decide it could make them uneconomical to manage and service.
However, we have built our reputation on our ability to manage complex situations and out-of-the-ordinary mortgage applications. All applications are checked by an underwriter which means we can look at the circumstances in greater detail and use our experience to make a decision.
Saffron’s lending policy
If you are looking at a Regulated Buy To Let we advise that you contact our dedicated BDMs to talk about the application. However, please bear in mind these key elements of our policy:
- Property can be let to a family member and up to an additional two tenants.
- Minimum and maximum loan amounts will be line with standard BTL products
- Maximum LTV as per standard BTL products – currently 75%
A regulated mortgage will be considered as foreign currency, and therefore declined as part of our policy, when the following criteria apply:
- The borrower resides in an EEA state, or
- The income or assets used to repay the loan in a currency other than Sterling
The approach to affordability will follow that used for regulated residential mortgages, and in most cases it is expected that the assessment will be similar to that for second homes. As a regulated mortgage contract, affordability will be based on personal income and expenditure rather than rental cover. You can find our acceptable income definition in the residential criteria section of our intermediary website. Please note, this excludes any rent payable by any family member.
The example below demonstrates how this works:
- Parents (the customers) wish to purchase a house for their daughter and her two friends to live in while at university.
- Each will pay £500 per month in rent.
- The mortgage required is £200k.
- The customers have a combined annual salary of £50,000.
- They have a residential mortgage costing them £500 pm but no other buy to let properties.
Affordability would be calculated as follows:
- Rental income is calculated as 50% of rent from the two non-family tenants. Rent from the family member is excluded for the purposes of affordability.
- Annual Income: £56,000 (their annual £50,000 salary plus £6,000 rent).
- Monthly outgoings in the form of their own residential mortgage at £500 per month.
If you want to learn more about Regulated Buy To Let mortgages, please contact one of our Business Development Managers.
Head of Mortgage Sales