There are two key reasons a mortgage for your own home and a mortgage for an investment property have different loan terms:
- The money to make repayments is generally coming from different sources. Your home mortgage is almost certainly repaid out of your earnings, so it’s a kind of personal loan. The mortgage on an investment property is usually repaid out of rental income, so it’s seen as a business transaction.
- Lenders consider buy to lets a higher risk. That’s because at some point there are likely to be void periods and your tenants could also fall into rent arrears, meaning there would be no rental income to repay the mortgage.
That’s why buy-to-let mortgages generally have a lower loan to value than resi mortages and an additional couple of percent on the interest rate.
What if I’m caught?
Pre-credit crunch, it was pretty much the case that as long as you were making the monthly payments, your lender was highly unlikely to ever check up on your situation. But with the increase in the number of ‘accidental landlords’ over the last 10 years, lenders are actually being proactive in checking up on the status of their mortgagees, seeing whether properties are being advertised for rent online and looking at electoral rolls to find out where people are living.
If your lender finds out you’re letting a property that’s got a resi mortage, they could:
- Whack up your interest rate
- Fine you
- Demand back payments to cover additional interest owed, or even…
- …Call in the whole mortgage, meaning you’d have to repay it in full and then declare that this had happened in any future mortgage applications.
In other words, it’s really not worth trying to sneak around the law.
There is an exception: ‘consent to let’
If you want to let a property that’s currently on a residential mortgage, you can apply to your lender for ‘consent to let’, but it’s a short-term solution and only granted if there’s been a genuine change in your circumstances, e.g.
- You haven’t been able to sell it
- You’ve been relocated for work
- You’re moving in with or separating from a partner.
Because the basis on which they made the loan to you has changed – you’re now the landlord of the property and not living there yourself – the lender needs to revise the terms of the agreement. The three main things they’ll be looking at are:
- Why are you asking for consent to let? You’ve got to be able to prove that you’ve had a genuine change in circumstances and you’re not just trying to get around taking out a buy-to-let mortgage.
- Can you afford to keep making the mortgage payments? You’ve got to show you can keep paying the mortgage, even if there’s no rent coming in. That means providing evidence you either earn enough each month or have savings.
- What’s the expected rental income? You’ll need to supply your lender with a letter from a letting agent, stating the expected monthly rent. The agent has to be a member of a professional industry body, such as ARLA Propertymark.
It’s most likely that your interest rate will go up by one or two percent, and you’ll almost certainly have to pay an admin fee. Most lenders will only grant consent to let for 12 months, then you’ll need to reapply for a buy-to-let mortgage.
Again, if they suspect that your reasons for letting on a residential mortgage aren’t genuine and you’re just trying to get a better deal, they’ll definitely refuse you. So be up front about your situation, grab a good broker and get your property on the right mortgage.