Ensuring you have the right type of mortgage is crucial to your success as a buy-to-let landlord. In much the same way that you should ensure you have adequate landlord insurance (as opposed to normal home insurance) when letting your property, you need to get a buy-to-let mortgage, too.
Do Some Landlords Really Let With a Residential Mortgage?
It happpens, and probably more often than we would think or realise. Many landlords are probably doing it not realising they're actually committing mortgage fraud. Some will be well aware it's in the terms and conditions of their mortgage but not care about that!
Is There Really a Difference and Does it Matter?
The difference between a residential mortgage and a buy-to-let mortgage is simple. A residential mortgage is for a property you are buying to live in yourself, whereas a buy-to-let mortgage is for a property you are buying to let out to tenants.
The differences don't stop there, however, and one of the other ones may tell us why there are landlords out there happy to take the chance of letting out their property on a residential mortgage.
Why Do Landlords Take the Risk?
One reason is easy to understand. A residential mortgage is usually far cheaper than a buy-to-let one. Interest rates are better, and there isn't as much to pay in the way of product fees. Why is it more expensive? Due to the risk associated with buy-to-let lending; even with rent protection insurance you're still reliant on your tenants giving you rent to pay your mortgage.
How do Landlords Get a Residential Mortgage for a Buy-to-Let?
There's a couple of ways landlords tend to do this:
1. They just apply for a residential mortgage. How will a lender know if you're planning to move tenants in?
2. They buy a second home to live in, and decide to rent out their first, either by choice or by virtue of becoming an accidental landlord. They then don't tell their mortgage provider - those doing this deliberately may choose a different mortgage provider to their existing one to avoid answering questions.
Landlords who fit within point 2 should always inform their lender of their change in circumstances.
What are the Risks of Non-Compliance?
It depends on each individual lender and your case. While we do not at all condone having a residential mortgage for a buy-to-let property, if you are a landlord in this situation you should definitely check your mortgage terms to understand what could happen should your situation be discovered.
Typical penalties include:
- Lenders asking for the mortgage to be immediately repaid in full.
- Lenders automatically changing you onto a buy-to-let mortgage at a higher interest rate.
- Lenders adding financial penalties, either to your mortgage or to be paid as one off fees.
Is it really worth the risk?
Your Landlord Insurance Could be Invalidated, Too!
Most landlord insurance policies will be invalid if you do not have a buy-to-let mortgage for your property, and tenants are living in it. Imagine the feeling if your house burns down and you can't claim a penny on the insurance because you either couldn't be bothered to tell your mortgage provider you were letting the property or deliberately misled them!