To let, or not to let?

In 2007 a senior police officer, chief inspector Buttress, bought a farm and associated buildings with a residential mortgage. A little while later he decided to use some outbuildings as holiday lets and didn't tell his lender. As would be the case with almost any residential mortgage, this commercial use was in breach of the lender's conditions.

In 2011 he applied for a re-mortgage with the same lender to buy out his wife's interest in the farm as part of their divorce. Again, a residential mortgage was taken out with no mention of the ongoing commercial use.

Suddenly in March 2013, Buttress was publicly arrested in the police HQ itself, with a team of thirty police officers and a helicopter raiding his various addresses. The charge was mortgage fraud.

The prosecution seems to be on the premise that the chief inspector had gained financially by avoiding having to redeem his initial mortgage and by enjoying the lower residential interest rates compared to more expensive commercial mortgages. He also obtained his residential mortgage when a commercial one may not have been approved at all.

The chief inspector argued that the breaches were unintentional rather than dishonest,and was guilty only of a mere "sub-contractual breach". Fortunately for him, the jury agreed and he was ultimately cleared after a two-year struggle.

The small print

I have some sympathy with Buttress' initial breach in 2007. I've come across several people unwittingly committing the same breach, especially where their circumstances have unexpectedly changed. It's not uncommon, for family changes to mean moving to a larger family home while maintaining and letting out the original home (sometimes just temporarily).

Many, like the chief inspector, would never read the small print. Others are perhaps vaguely aware they should tell the lender but think that it can be treated as a 'what they don't know won't hurt them' matter.
This case has demonstrated that this isn't the case at all.

It's a little more difficult to have sympathy on the subsequent re-mortgage. He would have been presented with a new set of paperwork and might be expected to have realised that this was the time to regularise matters, or stand accused of deliberately misleading his lender.

More recently, the financial crises revealed
a lot of these practices and in the last few years, almost every aspect of mortgage borrowing has been tightened up significantly. We can expect undisclosed buy-to-lets to be cracked down on more and more. Very few cases, of course, will be as dramatic as it was for Buttress, but it's useful as a reminder that everyone involved should ensure they've caught up with how things stand now - both in order to protect our clients and ourselves.

Residential vs buy-to-let mortgage

Buy-to-let mortgages almost always have higher interest rates and require a larger deposit.

Residential mortgage affordability is assessed on the applicant's income.

Buy-to-let lending is sometimes just based on the anticipated rental income and typically has a larger arrangement fee.

Scott Gallacher is a director at Rowley Turton

He writes the regular IFA comment in Private Client Adviser