Can Rental Property Be Used As Collateral in the UK?

Maybe you’ve just recently become a landlord, so naturally, there are hundreds of questions about property and mortgage policy for rentals. One of those questions is usually about collateral mortgages tied to their rental property. So, can rental property be used as collateral in the UK?

Rental property, or buy-to-let, can be used as collateral in the UK. Moreover, there are buy-to-let mortgages specifically designed to serve as collateral against a rental property. Those loans are usually used as secured mortgages that aren’t tied to another property under a mortgage.

In this article, I’ll explain what a collateral mortgage is and what types of property mortgages there are. In addition, I’ll explain the difference between buy-to-let and residential mortgages and mention the criteria for a BTL mortgage.

A Collateral Mortgage: The Essentials

Collateral mortgages are a type of mortgage loan that is tied to some asset you possess. The value and type of that asset will affect the amount of money that can be borrowed from a lender.

Basically, the asset you choose to put against a mortgage serves you to get a large sum of money and serves your lenders as a safety measure if you’re no longer able to pay back the loan. This can be a tricky business, as you can imagine because you might be potentially giving something valuable of yours away.

All of a sudden, the term “collateral” becomes clearer: you’re putting something valuable you own to serve as an assurance you’ll pay off the loan. Otherwise, you lose the ownership of the collateral property in question.

Assets you can use as security for a loan can range in size and value. Generally speaking, the most common assets people use as collateral include:

Vehicles, such as a car.
Property, such as a house.
Smaller assets, such as jewellery.

Types of Collateral Mortgages Against Property

There are generally two ways of paying off a collateral mortgage people choose to have against their property (usually a house):

Interest-only mortgages. With this type, you pay only the interest on a monthly basis, and at the end of the mortgage process, you pay what you owe in one large sum of money.
Repayment mortgages. With this type, you’re paying a regular amount of money you owe on a monthly basis so that by the end of the mortgage period, your entire loan is paid off completely.

What if you already have one mortgage and want another one? That’s also possible, and landlords are the ones who usually take two, three, or more mortgages. That’s why there are two types of additional mortgages:

Secured mortgage: With this type of mortgage, you can get another mortgage deal even though you already have a primary mortgage. Essentially, you have multiple mortgages (usually for multiple properties).
Remortgaging: With remortgaging, you don’t add another mortgage loan. Rather, you change or update your primary mortgage deal. So, in the end, you still have one mortgage with different interest rates usually.

Buy-To-Let Mortgages vs. Residential Mortgages

Two additional types of mortgage relating to property use are residential and buy-to-let (BTL) mortgages.

Everything I mentioned above applies to both of these types of properties, from collateral assets to methods of paying off mortgage loans. However, these two types of properties are used for different purposes, and because of that, some specific differences will surface.

Before we continue, though, both of these properties fall under the category of investment properties and second homes (if you already have one). If you want to learn more about these two types, check out my article about the major differences between the two.

Residential Mortgages

So, residential mortgages are used for ordinary large properties, like houses or flats, where residents occupy that space for their own living purposes. In other words, such properties can’t be rented out.

Since we’re talking about huge sums of money that are used for buying a house or a flat, the mortgage term lasts for a couple of decades, usually about 25 to 30 years.

Buy-To-Let Mortgages

In the UK, there are special types of mortgages designated specifically for rental property, called BTL mortgages.

They are specially designed for landlords to use as collateral for loans that can be used for either buying another rental property or merely to improve the existing one.

At this point, we need to distinguish between professional landlords and “accidental landlords” because there are so-called landlord loans that are usually provided for professional landlords with multiple rental properties and secure credit history.

On the other hand, “accidental landlords” are people who don’t necessarily plan on becoming a landlord, but start renting out their property due to some unforeseen circumstances.

Their rental property is therefore classified and registered as either “Unregulated BTL” (for professional landlords) or “Consumer BTL” (for accidental landlords). As the term suggests, Unregulated BTL isn’t regulated by Financial Conduct Authority (FCA), whereas Consumer BTL is.

This is where a buy-to-let secured mortgage comes into play. BTL secured mortgage is a type of secured, or second charge mortgage that I mentioned above, which allows landlords to place their rental property as security for an additional mortgage.

BTL secured mortgages are one of the most common loan options among landlords for a few different reasons. First of all, with a BTL secured mortgage, you can renovate, update and modernise your rental property. Not only that, you can also purchase another rental property if you want to expand your income source.

More importantly, however, BTL secured mortgages are great for accidental landlords because they offer more security through additional regulations.

Criteria for BTL Mortgages

Naturally, every mortgage, collateral or otherwise, comes with a checklist borrowers need to go through for loan approval. The same goes for BTL mortgages, although these loans are generally more flexible with their criteria and methods of paying off the loan.

So, to be eligible for a BTL mortgage, you need to:

Meet age requirements. The basic requirement is to be over 18. However, different loan providers have their own policies in this regard. Because of that, you’ll see some lenders requiring their potential borrowers to be 18 and more, and some ask for 21 and more.
Own a (rental) property. If you’re trying to get a loan for a buy-to-let property, then you either need to have a residential property that you use and want to buy a BTL property or already have another BTL property.
Have some equity. This is an important element in this criteria. If your equity is valued less than the price of your property, that usually serves as a warning sign for future lenders.
Have a stable income. Lenders want to be sure that you’ll be able to pay for your loan on a stable and regular basis. That’s why the status and the amount of your income can affect lenders’ decisions to approve a loan.

Final Thoughts

If you’re renting out a property and want to get a loan against your rental but are unsure if that’s even possible, I’m here to tell you it’s completely possible and safe. There are even specially designed mortgages called buy-to-let (BTL) mortgages you can use against your rental property.

These mortgage options are generally really flexible and allow you to choose the safest option for yourself and your rental status.

Alec Hanson

Co-owner of Just Do Property Ltd, Alec has over 10 years experience investing in rental properties.

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