John Ellmore
Tim Leonard
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Buy-to-let mortgages are designed to provide the finance you need if you want to buy a property to rent out to tenants, but don’t have the funds to buy outright. Being a landlord can be rewarding financially, but it’s important to know how a buy-to-let mortgage works if you’re to succeed in securing the money you need to buy your own rental property.
To help you better understand, here we explain what a buy-to-let mortgage is, and everything else you need to know about mortgages for buy-to-let properties.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it
How buy-to-let mortgages work
In many ways a buy-to-let mortgage is similar to the mortgage you can get for a residential property. So having a larger deposit or amount of equity will normally give you a better chance of securing the best deals. Monthly repayments will need to be made as well, though lenders will offer buy-to-let mortgages in the expectation that the income you make from rent will cover these.
The big difference is that buy-to-let mortgages are mainly interest-only rather than repayment mortgages. This means your repayments only contribute to covering the interest on your mortgage and not the original loan amount – instead, you’ll have to pay this back when your mortgage term ends. It could be you have the funds available to settle this outright, or alternatively you might look to sell the property or take out a new mortgage to pay back what you owe. Something to consider is the risk of the property value decreasing in the future, meaning you could owe more than the property is worth at the time you sell it or remortgage.
Do I need a buy-to-let mortgage?
If you want to buy a rental property and need a mortgage to do so, a lender will usually require that you take out a buy-to-let mortgage. This is because lenders apply different, and often stricter, lending criteria to buy-to-let mortgages than to residential mortgages.
One instance when you might have a residential mortgage on a house you rent out is if a lender has given you temporary consent to let, because you’re struggling to sell a property where you have previously lived. Consent to let often involves a fee or a higher rate of interest and in some cases both.
A let-to-buy mortgage might be another alternative if you want to buy a new home in which to live but can’t or don’t want to sell your current home.
Who can get a buy-to-let mortgage?
Buy-to-let mortgages are available to both new and existing landlords, but this will usually vary between lenders. Generally, you’ll be expected to meet the following eligibility criteria:
- Earn at least £25,000 a year.
- Have a deposit of somewhere between 25% and 40% (some deals might go as low as 20%).
- Already be a homeowner outright or part way to paying off your mortgage.
- Be over 21 when you apply (some may be as low as 18)
- Be under a certain age when you apply so that you’re no older than an upper age limit (often 70 or 75) when your mortgage is due to end.
- Have a good credit score.
- Have your existing debt under control.
- Be in a comfortable enough financial position to allow you to take the risk to invest in property.
How much can I borrow using a buy-to-let mortgage?
Lenders base how much they are willing to lend on the level of rental income your buy-to-let property is expected to deliver. As a minimum, your anticipated rental income must cover your monthly mortgage repayments in their entirety and by at least 25% more. Based on these factors, lenders will work out the maximum you’re allowed to borrow. However, some lenders may want this additional coverage to be as high as 45%, to make certain you can afford a buy-to-let property.
You’ll need to research similar rental properties in your area online or ask the advice of a letting agent to get an idea of how much rent you’re likely to receive.
You can then use our buy-to-let mortgage calculator to see how much you might be able to borrow.
Things to consider before taking out a buy-to-let mortgage
If you want to be a landlord, it’s important to think about the following carefully before taking out a buy-to-let mortgage:
What if there’s no rental income?
Life as a landlord is unpredictable. Tenants come and go, but mortgage repayments are constantly hanging over your head. You need to keep up with your lender’s payment schedule whether you have tenants or not.
This is why many landlords put profit from rentals into savings accounts dedicated for repaying mortgage costs should tenants miss payments, pay late or leave your property before the tenancy agreement ends. Over the course of a 20- or 25-year mortgage, this could happen several times so it’s important you’re prepared.
Other associated buy-to-let mortgage costs
The monthly repayments on a buy-to-let mortgage are just one of the costs you could face as a landlord. Other expenses you should take into account include:
Landlord insurance: This specialist cover for landlords offers financial protection against damage to your rental property. Buildings and contents cover is usually standard, while optional policy extras are usually available to cover problems you might have with tenants, such as non-payment of rent, anti-social behaviour and the costs of eviction. While you are not legally obliged to take out landlord insurance, many lenders will insist you have landlord insurance in place as a condition of going ahead with their buy-to-let mortgage offer.
Legal fees: You will need to hire a solicitor or licensed conveyancer to complete the paperwork on your buy-to-let mortgage.
Product fee: There is often a fee to secure the mortgage deal of your choice, and fees tend to be higher than what you would pay for a similar residential mortgage.
Survey: You’ll need to pay for a surveyor to inspect the property you want to buy to check that there are no structural problems and that it is generally fit for sale.
Stamp duty: When buying another property in addition to where you live, stamp duty rules in England and Northern Ireland mean you’ll need to pay the usual stamp duty rate plus an additional 3% surcharge on top – and the same surcharge applies to Land Transaction Tax in Wales. Meanwhile, in Scotland, you’ll have to pay an Additional Dwelling Supplement, which is 6% of the total price of the property.
Agency fees: If you use an agency to manage your rental property, it will charge fees that you’ll need to pay.
Property maintenance: You’ll be expected to maintain the exterior of the property and pay to replace any furnishings, furniture and appliances included in the property due to general wear and tear.
Safety inspections: As a landlord, you must guarantee the safety of your tenants. This includes paying for safety tests, including an annual gas safety certificate and an electrical safety report at least every five years. You will also need to pay for smoke and carbon monoxide alarms to be installed.
Energy efficiency: You’ll need to provide a valid Energy Performance Certificate (EPC), which lasts for 10 years, when you market a rental property. While energy ratings range from A (highest) to G (lowest), a rental property must have a minimum rating of E so you may also need to pay for home improvements.
Tax and your buy to let
The rental income you receive will be liable for income tax at your marginal rate, although you may be able to deduct some expenses associated with being a landlord. These include letting agent fees, repair bills, the cost of landlord insurance, and council tax and utility bills. The mortgage interest you pay is no longer tax deductible but you could be eligible for a 20% tax credit instead.
Capital gains tax will also become a consideration when selling a rental property. If you are unsure you should consider getting professional tax advice on this subject.
Dive even deeper
A Guide to Family Buy-to-Let Mortgages
You may wish to use a family buy-to-let mortgage to let a property out to a close relative, but there are still mortgage criteria that need to be met and tax implications to weigh up. Read this guide to learn what to consider before applying as well as some of the pros and cons of this type of deal.
Rachel Lacey
Buy-to-let Mortgage Calculator
A buy-to-let mortgage calculator can help you work out the size of the loan you might need to purchase an investment property. Add your figures below to work out how much you could borrow for your buy-to-let property.
Brean Horne
What is a Let-to-Buy Mortgage?
A let-to-buy mortgage allows you to buy a new home and let out your existing property to bring in extra income. It can be useful if you can’t or don’t want to sell your current home, but can be a difficult process to negotiate. Consent to let is an alternative to let to buy you might consider.
John Fitzsimons