Residential vs BTL mortgage. What is legal?

Bluefox_2

I want to buy a house for my student daughter to live in and share with three friends, who would pay rent. When I posted on here before I got three replies from people who had done this, saying it could be bought in my daughter's name, with me as guarantor, on a residential mortgage. I have just spoken to a whole of market mortgage advisor who has basically said that this is not legal. He says if the rental income exceeds £4K per annum then FSA rules will only allow lenders to offer a BTL motgage. Does anyone know if this is correct? He was very insistent about it. I would be able to borrow quite a bit less on a BTL mortgage so it is important to know exactly where I stand.

AndrewSmith

Hi,

I have just spoken with the technical lending team provided by my principal company.

Technically the Broker is right. The definition of it becoming a buy to let situation is that the owner will be making a commercial profit, ie rent will used to pay the mortgage. However it is not going to be straight forward to arrange a buy to let mortgage for the following reasons:

The owner (or part owner) cannot actually reside at the property coupled with the fact that where more than one person is contributing to the rent, it usually must be on a single Assured Shorthold Tennancy agreement. Most lenders will not allow multiple AST agreements. This could cause a problem if one of the friends wants to move out before the end of, for example, the 6 month rental agreement.

I have been advised that the best way to approach this would be for you to purchase on a buy to let basis, without including your daughter on the mortgage, using a lender who will allow letting to a family member as part of the single AST agreement, or a lender who will allow multi AST agreements.

Some Lenders who may accept this are-

Capital Home Loans
Skipton Building Society
Royal Bank of Scotland
Derbyshire Building Society

Hope this helps

Andy

Bluefox_2

Thanks Andy. That's helpful although this seems to be getting a lot more complicated than I was led to believe it would be. I have already made some enquiries about the type of rental agreements students have for a shared property and it seems that they sign up for a full year, July to June. They have individual agreements but it is very difficult for them to get out of them and move during that time. The University often deal with the tenancy agreements, to safeguard the students, but I haven't seen the wording of one yet.

AndrewSmith

It's all about covering one's rear and protecting interest.

You could apply for a residential mortgage standing as guarantor for your daughter and simply not tell the lender that you were letting 3 friends rent rooms. However if something went wrong ie: there was a fire for example or one of them flooded the bathroom causing damage, the truth would come out during the loss adjusters investigation. Ultimately you may find your insurance invalidated and have to pay for the repairs yourself. Also when the insurer reports back to the lender you may find that they take umbridge to not being informed of the fact that you have rented out rooms, and load your interest rate to reflect buy to let, and backdate it to the beginning of the tennancy.

There are always ways around these type of things but, in my 12 years experience in this industry, it is always better in the end to be completely honest and up-front with a lender / broker, which is what you have done and I commend you for that.

Lenders have criteria and restrictions in place for a reason, that reason being they want to know what is going to happen in the property they will be financing. It is the lender's money after all. Also by telling them up front you will get the most appropriate product to fit what you are looking to do, and you will have full protection against mis-advice.

As for the rental agreement, as landlord you stipulate that you want the 4 of them (daughter and 3 friends) to be party to a 1 year Assured Shorthold Tennancy agreement together. It is your choice as you are the landlord. If they are not thinking of leaving within that time they should be happy to agree to it.

Hope this helps

Andy

MortgageMamma

Hi there

You will also need to consider landlords buildilg and contents insurance and perhaps some form of home emergency cover (central heating breakdown, electrical failure, loss of keys, overnight accomodation for tenants, drains etc) there are some specifically designed for landlords and go from 10per month per property. Could save you a small fortune on tradesmen fee's. If you are not fully aware of your responsibilities of a landlord you could look to the national landlords association for guidance. https://www.rla.org.uk