Regulated Buy to Let Mortgages

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In straightforward terms, the majority of buy-to-let mortgages fall outside the purview of the Financial Conduct Authority (FCA) regulations. This exemption stems from their classification as business transactions, rendering them ineligible for the consumer regulations implemented by the FCA to safeguard the general public. This distinction holds true irrespective of the lender’s size or prominence, whether it’s HSBC, Santander, or Lloyds Banking Group. Even though these lenders are subject to regulation by the FCA and PRA (Prudential Regulation Authority), buy-to-let mortgages used for non-related tenants are consistently labelled as ‘non-regulated’ products.

When individuals apply for buy-to-let mortgages, the primary goal is typically property investment, involving activities like refinancing existing buy-to-let properties or expanding their investment property portfolio. Consequently, these mortgage transactions are categorized as business transactions, exempting them from the additional restrictions, eligibility assessments, or consumer protection measures imposed by the FCA’s regulations. This distinction underscores the business nature of buy-to-let mortgages, emphasizing their exemption from certain regulatory constraints compared to consumer-focused financial transactions.

But are there any types of buy to let that are regulated?

Certainly, there are exceptions to the general rule, and it can become somewhat intricate.

An exception worth noting is the category known as ‘Consumer Buy to Let.‘ This relatively recent classification of mortgages is designed to provide protection, particularly for “accidental” landlords, as opposed to those engaging in professional property management.

For instance, consider someone who has inherited a property and intends to lease it out. Another common scenario involves renting out a property to an immediate family member as the tenant. It’s important to note that some lenders may choose not to provide loans in situations like these due to certain restrictions.

Applications falling under the Consumer Buy to Let category are subject to FCA regulation, treating the transaction with consumer protections similar to those associated with a traditional residential mortgage. This distinction aims to address specific scenarios, ensuring regulatory oversight in cases involving inherited properties or properties leased to immediate family members.

So why is this important?

Clearly understanding whether your buy-to-let property falls under FCA regulation is crucial. It not only influences the required checks during the mortgage application but significantly affects your eligibility with lenders, available products, and the necessary deposit. Our team ensures to inquire about these essential details from the initial call, ensuring you have a clear understanding and avoid investing time and energy in deals that may not align with your situation.

Is this the end for the small-time landlord?

This year has witnessed a substantial number of landlords divesting their properties. Alongside the property investors and portfolio holders we assist at Open Property Group, there’s a significant portion exiting the market. Agent Hamptons, utilizing its data in conjunction with HMRC figures, revealed that property investors are poised to sell 139,820 buy-to-lets across Great Britain in 2023. This substantial exodus has had a critical impact on the availability of rental properties in circulation. To be specific, Hamptons noted that landlords acquired 11.2% of all homes sold across Great Britain this year. However, private landlords also constituted 14.0% of all sellers during the same period, resulting in a net loss for the buy-to-let market.

We concur with the agent’s observation that ‘buy-to-let increasingly only stacks up for the highest-yielding homes, especially for investors with a mortgage.’ Consequently, landlords are increasingly offloading lower-yielding properties.

Buy-to-let mortgage arrears spike

During the third quarter of 2023, there has been a notable 29% increase in the number of buy-to-let mortgages in arrears, reaching just over 11,500, as reported by UK Finance. In contrast, owner occupiers experienced a more modest quarter-on-quarter rise of 7%. This surge in arrears signals a challenging environment for landlords in the buy-to-let sector, where the impact of interest rate pressures is keenly felt. Unlike owner occupiers, landlords may find it difficult to adjust rental rates to cover the heightened costs associated with increased mortgage payments.

The collective representation of the banking and finance industry underscores the unique challenges faced by buy-to-let landlords. With interest rates posing a significant hurdle, landlords in this sector may be constrained in their ability to maintain profitability, potentially leading to an increase in the number of properties being put up for sale by landlords who find it challenging to secure remortgages with comparable rates. This trend may further impact the dynamics of the property market and rental availability.

Red tape pushing landlords to the brink

A significant portion, comprising 23%, attributed their decision to sell to the burden of excessive legislation and compliance requirements. Additionally, 24% pointed to escalating mortgage costs and/or shifts in the tax framework as influencing factors. Clients who participated in the survey indicated that they were divesting properties due to various reasons, including ownership of problematic assets, lack of profitability in their investments, management challenges, or dealing with tenants in rent arrears.