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What is a regulated mortgage?

Last week I talked about let to buy and how Financial Conduct Authority (FCA) regulation, among other things, determines why residential and buy to let mortgages are completely separate. I want to go into a bit more depth about what a regulated mortgage is, and what it means for a mortgage to be regulated.

So, what is a regulated mortgage?

Most people would agree that consumer protection is a good thing. FCA regulation is just that – measures designed to protect mortgage customers from mis-selling, bad advice and other such nastiness. Like with any regulation, a comprehensive list would take a good week to plough through, but here are a few key points:

  • The person giving you mortgage advice must be qualified and supervised by the FCA
  • Certain rules need to be followed showing that the lender took account of all your personal needs and circumstances
  • You’d get a ‘key facts illustration’ of any mortgage that was recommended to you, along with an explanation of why it was suitable

Regulation also dictates how you are treated throughout the mortgage term and how the lender deals with problems like arrears.

Will your mortgage be regulated?

Is it a buy to let mortgage? If so, probably not.

For a mortgage to be regulated, at least two fifths (40%) of the property being mortgaged needs to be used for residential purposes by the borrower or a close relative (so a spouse, partner, parent, sibling, child, grandchild or grandparent). A buy to let mortgage would only be regulated if:

  • You or a family member would be occupying a lot of the property
  • Your tenant would be a member of your family
  • You intend to move back into the property at some point in the future

A buy to let mortgage is otherwise considered a commercial mortgage, similar to a mortgage for an office or shop. Commercial mortgages aren’t regulated.

What does it mean that your mortgage isn’t regulated?

The good

One reason commercial mortgages aren’t regulated is that business borrowers are considered to be a bit savvier about risks and a little more equipped to deal with potential losses. However, FCA regulation also means that a mortgage must be assessed on affordability. This means your income has to cover the cost of the loan (usually, the loan can’t be more than four times what you and another applicant, if any, earn in a year).

Unregulated loans can be assessed on the business potential of the property being mortgaged – what you’d call the ‘generative qualities’ if you wanted to appear clever. To us landlords, that’s the potential rent. This means that landlords on lower incomes can potentially afford more expensive properties, provided they would fetch a decent rent.

The not-so-good

Last week I also mentioned that if you live in a buy to let mortgaged property or let out a residential mortgaged property, you’re pretty much committing fraud. Regulation means that there’s no grey area between residential and buy to let mortgages, making them fairly inflexible for things like holiday homes and ‘letting to buy’.

The bad

Unless you’re careful about where you go, you might not get the most suitable mortgage advice. However, whilst buy to let mortgages aren’t regulated, we at TurnKey Landlords still follow FCA guidelines when providing mortgage advice, which includes making sure that all advice and recommended products are suitable and affordable for you.

If you want a little more in-depth read about the finer points of FCA regulation, the Council of Mortgage Lenders has a comprehensive run-down in their ‘policy’ section.

Did you breathe a sigh of relief recently when the buy to let market narrowly missed new regulation? Or do you think a little more regulation would be a good thing? Let us know your thoughts in the comments section below.

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Amelia Vargo is an online marketing executive for CT Capital. Amelia writes for Turnkey Mortgages, Turnkey Landlords, TurnKey Bridging, TurnKey Life and Commercial Trust.