How buy-to-let differs from residential mortgage advice

“The main difference between a buy-to-let mortgage and a residential owner-occupier mortgage is that the mortgage provider will consider the potential rental income when assessing affordability,” says Greg Went, senior product manager at Nationwide.

Ray Boulger, senior technical manager at John Charcol, adds that most BTL mortgages have historically been arranged on an interest-only basis.

“Even those lenders which no longer offer residential mortgages on an interest-only basis recognise that interest-only is the norm for BTL mortgages and so interest-only criteria has not been changed for BTL mortgages,” he says.

Many lenders have pulled out of offering interest-only loans to residential buyers following FSA pronouncements regarding an upcoming review of the sector, which many suggest could uncover long-running mis-selling.

Mr Boulger points out that another key difference with residential mortgage is that the maximum loan-to-value is generally lower.

“Some lenders have a more sensible policy than they do on residential mortgages on the maximum age at the end of the term, with one lender having a maximum age on BTL mortgages of 90.”

He adds that most lenders also stipulate the property cannot be let to a member of the borrower’s family.

“The reason given for this is that if at least 40 per cent of a property is occupied by the borrower, or a member of their family it becomes a regulated mortgage, which obviously changes some of the lender disclosures, etc.”

As with the residential market there are a number of different types of buy-to-let mortgages such as fixed, variable and trackers.

“As with residential mortgages some variable rates are discounts off the lender’s SVR and some are trackers, mostly tracking bank rate but with a few tracking three-month Libor,” says Mr Boulger.

“Also the ‘revert to’ rate is more likely to be a tracker than on residential mortgages. In general arrangement fees are higher and percentage-based fees are more common than on residential mortgages.”

The differences between providers’ products will generally be the revert-to rate and especially important is the rental cover, as this varies considerably from lender to lender.

If an owner-occupier wants to convert to buy-to-let, they need to either ask their existing lender for permission to let or remortgage to a BTL deal.

Mr Boulger says: “Most lenders will in most circumstances give permission to let, sometimes for a limited period and often at a higher interest rate. If permission to let is granted on a regulated residential mortgage it remains FSA regulated.”

There are a handful of lenders that offer bespoke let-to-buy mortgages that allow borrowers to remortgage their existing residential property as a buy-to-let in order to purchase a new home.