Landlord Products / Services
In short, no.
But I suspect you already knew that. Those asking the question are really wanting to know the answer to the following question, usually: “can I get away with doing it?”
The reality is, it’s not unheard of, in fact, it’s common practice for many landlords to have a ‘residential’ mortgage when letting out they’re property, while they’re actually meant to have a buy-to-let mortgage. That, my friend, is called “mortgage fraud”, apparently.
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. Regular ‘residential’ mortgages are specifically for properties that are occupied by the homeowner.
Why do landlords get a Residential mortgage for a Buy-To-Let property?
Well, that’s the easy part.
It’s generally 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 3 most common scenarios that lead to property owners getting the wrong type of mortgage::
- Firstly, and most obviously, the applicant will apply for a residential mortgage either directly through a lender or through a mortgage broker, while having full intentions of letting the property.
- Secondly, many homeowners buy a second home, which they make into their new residential home. The property they were living in before is let out. In this situation the homeowner should inform their lender that they’re letting out the first property. The lender may or may not make changes to the existing mortgage policy in order to reflect the change in circumstances. In any case, the lender should always be notified.
- Thirdly, many homeowners, for one reason or another, vacate their home so they can let it out to make some extra money.
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 very real:
- 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
Needless to say, the potential risks seem too hefty for my blood.
The penalties enforced by the lender is not half as bad as the penalties your Landlord Insurance provider could enforce…
Building Insurance
Having the incorrect mortgage will 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/Specialist
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 sometimes 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!
So, can you get away with a Residential Mortgage for a Rental Property?
The reality is, many landlords DO get away with it.
Equally, many get caught out, and end up paying a hefty price.
As said, I don’t think the risks are worth it, so it’s a practise I will never encourage or condone.
Disclaimer: I'm just a landlord blogger; I'm 100% not qualified to give legal or financial advice. I'm a doofus. Any information I share is my unqualified opinion, and should never be construed as professional legal or financial advice. You should definitely get advice from a qualified professional for any legal or financial matters. For more information, please read my full disclaimer.
Thanks for posting. A Residential Buy-to-let Mortgage is a secured business loan and an arrangement fee, as well as security and valuation fees will apply.