It’s not unheard of, in fact, it’s common practice for many landlords to have a residential mortgage for a property they’re letting, meaning they’re actually meant to have a buy-to-let mortgage. Apparently it’s called “mortgage fraud” – one thing is for sure, it’s against the terms and conditions of any mortgage lender I’ve heard of.
What’s the difference between a residential mortgage and a buy-to-let mortgage?
Simply, buy-to-let mortgages are specifically for properties that landlords let to tenants. Standard residential mortgages are specifically for properties that home owners want as their residential home(s).
Why do landlords get a Residential mortgage for a Buy-To-Let property?
Well, that’s the easy part.
It’s generally a lot cheaper to get a residential mortgage. Interest rates are typically lower and so are the product fees. This is the case because lenders see buy-to-let properties as higher risk.
The 2 most common ways of getting a residential mortgage for a buy-to0let property are as follows:
- Firstly, and most obviously, the landlord will just apply for a residential mortgage either directly through a lender or through a mortgage broker. Lenders are generally none the wiser- how are they to know what the intentions of the home owner is?
- Secondly, a lot of home-owners buy a second home, which they make into their residential home. The property they were living in before is let out. In this situation the home-owner should inform their lender that they’re letting out the property. The lender may or may not make changes to the existing mortgage policy, but they should still be informed because they will need to update their records.
Be wary of Mortgage Brokers
I’ve heard of many cases where mortgage brokers/advisers encourage their clients to apply for residential mortgages while knowing full well they’re going to let out their property. Presumably because, mortgage brokers typically get paid by the lenders for every mortgage that gets approved, so they want to get as many mortgages approved as possible.
The thing is, residential mortgage rates are a lot more affordable for borrowers, so it makes sense for brokers to push their clients in that direction, or at least not entirely discourage the notion (when they strictly should).
The penalties for using a Residential Mortgage for a Buy-To-Let Property
It really depends on the lender, and each lender is different. However, the following penalties are not unheard of:
- Revoke your loan and ask for immediate redemption of the mortgage
- Automatically change your rates to a higher amount that reflects their current Buy-to-let products
- Enforce financial penalties
In my opinion, it’s not worth taking the risk.
The penalties enforced by the lender is not half as bad as the penalties your Landlord Insurance provider could enforce…
Having the incorrect mortgage would most likely invalidate your Landlord Insurance. In the event of an emergency (e.g. property burns down), you would not be covered with insurance. Most Insurers cover themselves by stating in the terms and conditions of the policy that the policyholder has the lenders permission to let.
Talk to a mortgage broker/advisor
Using the services of an experienced buy-to-let mortgage broker/adviser can be invaluable in helping you through the nuances of different lenders’ conditions.
Additionally, specialised buy-to-let mortgage brokers some times have access to mortgage deals you normally wouldn’t, so it’s always worth talking to one to find out what rates they can offer!
Disclaimer: I'm just a simple landlord blogger, I am not qualified to give legal or financial advice. Any advice I give is my opinion based on my experience, and is never legal or professional advice. You should always get professional advice on any legal and financial matters!