Different mortgage types serve to different purposes, and thus they all in a different manner. This blog describes dissimilarities between the buy-to-let mortgage and residential mortgage. Clarity of the reasons of contrast between the two mortgage products is necessary to achieve confidence in the financial decision.
The difference of meaning
The underlying meaning or definition of the financial products is the first step to understand their individual features.
Buy-to-let mortgages are basically for commercial use of the property. The professional landlords and housing companies rent out the properties, and they pay the instalment through the rent received.
Residential mortgages are taken by the person who aims to live in the house he wants to buy. The buyer wants to stay in the house, and thus it becomes a residential mortgage.
|In a buy-to-let mortgage, the lender majorly scrutinizes the possibility of rental income. The reason you know already, yes the borrower pays through the rental income.||The lender gets into the details of the current income status of the applicant. The applicant pays through its income, and that is why the mortgage company wants to know the repaying capacity.|
|Interest-only mortgage method is majorly popular in the buy-to-let mortgages. The reason is these were established with interest-only mode. The borrower needs to pay the interest part as instalment from the rent, and the rest of the amount can be investment somewhere else.||A residential mortgage is based on the repayment method. A homeowner has no purpose of saving money from instalments and investing somewhere else. Also, the property is used for residential purpose.|
Buy-to-let mortgages are tax-deductible while the residential mortgages are not. It can be a significant benefit for the landlords, as that helps a lot in bringing down the overall cost of the mortgage. But what percentage is tax-deductible depends on the lender and also on location in the UK.
Residential mortgage interest rate is not tax-deductible; this may be called as a drawback if you compare with the buy-to-let mortgages. However, there are many other reasons in which a residential mortgage is more affordable. The mortgage companies have to follow the rules and regulations set by the industry.
|Interest rates in buy-to-let mortgages are high. The reason is they are used for commercial reasons, and commercial mortgages always have higher rates. The borrower has many houses, and the interest-only method makes instalments even more affordable.||The rate of interest is low, and the instalments are small as compared to the buy-to-let. The borrowers have the only house to tackle.|
|The minimum deposit size in buy-to-let is 20% to 25%. Depending on the financial conditions of the borrower, the lender may ask for more. For instance, the poor credit score situation makes the lender ask for more.||The minimum deposit amount is 5% to 10% depending on the demand of the mortgage company. Here also the rule of financial conditions applies, and if the borrower has any financial flaw, the lender may ask for a bigger deposit.|
Regulated and non-regulated
Buy-to-let mortgages are still not regulated by any regulatory authority. This fact makes the mortgages a bit risky for the borrower because if something fake happens, the borrower has less legal support. In recent times, some attention has been given to these mortgages, but still, a lot of work is left. With time the buy-to-let market also may get a bit more organized form.
Residential mortgages are completely backed-up by the lending rules and FCA list of ethics that every lender needs to follow. If something wrong happens, the borrower has all the rights to reach to the court or regulatory authority (FCA) to demand his right. Even the interest rates are capped at a specific limit. In short, nothing is untamed in the residential mortgage, and the well-being of the borrowers is wholly secured.
|A buy-to-let borrower does not need to inform to the lender if he changes the tenant or gets into any new tenant agreement.||If a borrower wants to leave the house and rent it out to someone else, it is vital to inform to the lender. Otherwise, it is considered as a fraud.|
|Buy-to-let mortgages are considered as the business transaction as their purpose is also earning rental income.||A residential mortgage is never a business transaction because the purchased property is used for residential purpose.|
Your understanding of how and where two mortgage products differ can make a lot of difference. A financially literate person is always safe in his/her finances. One this is clear that buy-to-let mortgage is suitable for business-minded people while the residential mortgage is the choice of a family person. But it does not matter what is more suitable for whom. The main thing is that there is something for everyone. Few features are standard in every mortgage such as mortgage payment holiday, customization etc.