It’s a commonly asked question.
The mortgage on your home is regulated. If you were to take out a further advance or a second mortgage, these would be regulated.
Why aren’t buy to let mortgages regulated by the Financial Conduct Authority (FCA)?
It’s all down to the FCA, the Financial Conduct Authority. In the UK they regulate the sale of mortgages, and both lenders and brokers need to follow their rules.
This article aims to shed some light on the reason behind the lack of FCA regulation for most BTLs and the implications this has for you as an investor.
What Exactly is a Buy to Let?
Essentially, a Buy to Let property is a residential property that you, as an investor, purchase with the intention of renting it out to tenants rather than living in it yourself. The property could be a house or a flat.
Buy to let is all about long term rental. The tenants will make your property their home, and live there permanently.
This type of letting requires an Assured Shorthold Tenancy (AST) agreement. This is a flexible rental agreement, typically lasting for a term of six months to a year, although it can be extended.
Furnished BTL properties come equipped with essential furniture and appliances, making them ready for tenants to move in immediately. This can be a selling point for tenants in search of convenience, and it may allow you to charge higher rent. However, it also entails a higher upfront investment and ongoing maintenance costs.
Unfurnished properties, on the other hand, are somewhat of a blank canvas. They offer tenants the freedom to bring in their own furniture and make the space their own. While this might attract a different demographic of tenants, such as those looking to stay for a longer period or those with their own furniture, it also minimises your initial investment and the need for maintenance on your part.
The Nature of BTL Mortgages
A non-regulated mortgage is a type of mortgage that falls outside the scope of regulatory authorities, such as the Financial Conduct Authority (FCA) in the UK. This classification is primarily due to the nature of the transaction and the purpose of the mortgage.
In most cases, non-regulated mortgages are associated with business or investment transactions rather than personal, residential ones. For instance, Buy to Let (BTL) mortgages, where the property is intended to be rented out to tenants, are considered non-regulated as they are viewed as business transactions. The premise here is that individuals engaging in such transactions are presumed to have a level of financial savvy and, therefore, require less regulatory protection compared to typical consumers.
This distinctive nature of BTL mortgages sets them apart from traditional residential mortgages, which are subject to more stringent regulatory oversight to safeguard the interests of the general public.
The FCA’s Consumer Regulations and BTL
The FCA’s consumer regulations are designed to protect individuals in their financial dealings.
However, as BTL mortgages are typically pursued by individuals with business intentions—whether it’s to generate rental income or capital growth—they fall outside of these consumer-focused regulations. The labels of “non-regulated” on the product quotes you receive are indicative of this distinction.
Exceptions to the Rule
However, not all buy-to-let mortgages escape FCA regulation.
A notable exception is the ‘Consumer Buy to Let’ mortgage category, aimed at protecting “accidental” landlords. If you’ve inherited a property or plan to rent out a property to an immediate family member, you fall into this unique bracket. Under these circumstances, your BTL mortgage would be subject to FCA regulation, akin to the regulatory framework surrounding standard residential mortgages.
An example of this would be a buy for uni mortgage, or a student mortgage. This is a buy to let mortgage so that university students can buy a home to live in, rather than renting, and it allows them to rent out rooms to mates as well.
Portfolio landlords
Slightly different underwriting rules will apply to investors classed as a portfolio landlord. These come in to effect once you own four or more mortgaged buy to let properties. Read more.
Implications for Applicants
The regulatory status of your BTL mortgage is very significant for the mortgage application process.
FCA rules are primarily there to protect the consumer, the person taking out the mortgage. If something goes wrong then there is a structured complaints process that brokers and lenders need to follow.
But this does not apply to ‘non-regulated’ mortgages. There’s no protection and no redress. And the application process is slightly different because of this.
Final thoughts
Knowing whether your buy to let falls under the FCA regulation or not, is important.
Firstly, not all lenders offer ‘regulated’ mortgages, due to the stringent rules and requirements. So the definition will not only impact what checks are needed in the application process, but it will also impact which lenders and products you have access to.
