It still happens too frequently that, in pursuit of a cheap interest rate, people will use an inappropriate mortgage product, intentionally misleading the lender.
For example, using a standard residential mortgage for a property that is then used as a buy to let or holiday let.
Essentially, in the minds of mortgage lenders, there are 4 uses for your property and the mortgage lender arranges pricing and mortgage terms and conditions in accordance with the risk that they believe they are taking in line with your usage.
This is especially true if your usage is going to produce an income which in part or in whole is going to be used to pay the mortgage or to justify the loan size and the affordability of the mortgage to you.
Our policy here at Drake Mortgages is quite simple. We will tell you which type of mortgage product you need to fit your chosen category of use. We cannot organise a mortgage for you, despite any request from you, when we know that you will infringe the mortgage conditions.
The categories are:
1-Your main residence
In this case the lender believes it will be occupied by you and your family and therefore your earned income will be main criterion in the lenders mind for affordability. In terms of interest rate, residential mortgages are the cheapest.
2-A second home or a holiday home
Be very careful here. The use of the term “holiday home”; in this context, it refers to your use as a holiday home and not letting it to third parties. There exists a very small number of lenders who will allow your holiday home to be let to third parties, but there are time limitations on such letting. These are normally between 16 and 18 weeks per annum. These mortgages are not intended to have a primary use as a holiday let. Affordability will be based on your earned income and not on any income from holiday letting. It is not a coincidence that these usage limitations fit in with HMRC conditions of what constitutes a holiday let.
For guidance see HMRC Self Assessment help sheet HS253 or visit https://www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet/hs253-furnished-holiday-lettings-2018.
Pricing of these mortgages is very similar to residential mortgages.
3-A Buy-to-Let property
The availability and popularity of this category has been with us for just over 20 years. The usage of the property is for letting to long term tenants on an Assured Shorthold Tenancy. Whereas the lender likes to have some knowledge of your earned income, it is primarily the rent you will receive which determines the loan size and affordability. The buy to let lenders, and particularly their surveyors, will determine the achievability of the level of rent claimed by the applicant by evaluating the market demand and the market rate.
The pricing of BTL mortgages has reduced significantly over the last 5 years and they tend to be only 0.5% to 1.0% more expensive than residential mortgages
4-A Holiday Let property
The correct term for this is a furnished holiday let or an FHL (see the HMRC reference above for the full definition). The usage here is for short term letting to holiday makers typically a week or a fortnight. You will need to apply for a holiday let mortgage. As with BTL, the lender will make his own assessment of the achievable income from holiday letting and will always ask you to approach a recognised holiday letting agent, at application stage, for their written projection. As with a BTL application, your personal income is noted but the main criterion is the holiday letting income projection.
Pricing has reduced in the last year or two as more lenders enter the market and now is very similar to BTL
Obviously, it is the inappropriate the use of the cheaper mortgages, instead of the more expensive ones, that cause the problem. You will have obtained that loan using a justification, usually the income justification, for which the lender has not accounted, thus, effectively by deception.
Let us be quite clear. This is fraud. If you are found out, the consequences could be much wider reaching than you realise.
The consequences
It is not just one item from the list below, it is more likely to be most of the list below.
- Cancellation of the mortgage and immediate demand for its repayment and if this is not forthcoming, then repossession.
- Reported to credit agencies
- Reported to CIFAS, the fraud prevention service, who in turn will alert a number of agencies and providers of credit, not related to the property
- Cancellation of the property insurance and inability to get new ones
- Cancellation of other insurances not associated with property, including possibly your car
- Notification to HMRC
- All new credit applications for any kind of credit being cancelled/refused
- A criminal record
Being discovered
We are frequently told by prospective borrowers that “the mortgage lender will never find out”.
So, how could you be found out?
- An insurance claim
- A neighbour
- A dissatisfied customer
- An EHO complaint
- Viewing your property on the internet
- Airbnb listings
- Anyone servicing the property; a dustman, or a postman,
- If you have an apartment, then it could be a concierge or managing agent
- HMRC
To go into a bit more detail.
- Insurance claim. Firstly, whereas small claims are usually settled without much fuss or investigation, larger claims will inevitably involve a loss adjuster, who will visit the property. Bear in mind that it is the large claims that you will want to have settled, for example a fire. Loss adjusters are employed by insurers to investigate claims and make sure that the correct insurance has been bought and that no conditions gave been infringed. I could say cynically that they will look to find every way of not paying the claim. Even if you have bought cover for holiday letting, if he investigates the mortgage and sees you have the wrong one, it gives him an excuse not to pay the claim. Not only could you be left with the burnt-out shell of the house, but also the loss adjuster will notify the lender. If your holidaymakers cause a disturbance, we know of cases when neighbours have complained to all and sundry, including mortgage lenders
- Vindictive dissatisfied holiday makers, rather like neighbours, will complain to whoever makes the most trouble for you
- Environmental Health Officers are frequent recipients of complaints about behaviour and not only could they stop you letting but also could check the Town Planning conditions and also could cause you to be charged full business rates
- If the holidaymakers annoy anyone servicing the property e.g. by not leaving waste the way the dustman expects it, then it is a question of how far his complaints goes
- Concierges receiving complaints are likely to act more quickly than any other complainant
- The HMRC guidance I have referred to above, shows the many advantages of FHL over BTL. You will see in that guidance the very specific conditions that are required to qualify for FHL. If HMRC have any reason to ask you for more details and suspicions are aroused about the validity of your tax return, then once again there are many other people, not least your mortgage lender, that may be asked for information.
Getting the right mortgage
Making sure your mortgage is aligned with how the property is being used can be done in a few ways.
When you buy it – If you know your intentions at the outset then you can apply for the most appropriate mortgage. Our brokers will help if you’re unsure which one to go for.
Remortgage – If you already own the property and it’s now being used for a different purpose then a remortgage can help. This means moving your mortgage to a new lender, who is accepting of the intended use.
Consent to let – A Consent to Let will be needed if you don’t want to do the other two options. Basically it is formally asking your lender for their permission to rent it out. This tends to be for temporary periods only, up to 12 months.
- About the Author
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Norman has been in the financial services industry since 1987. For the first 10 to 15 years this was quite broad in scope including inheritance tax, residential mortgages and pensions, but this gradually changed such that since 2005 he has specialised in property finance.
