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 has the potential to be rewarding financially, but it’s important to know how a buy-to-let mortgage works if you’re to succeed in securing the mortgage 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.
What is a buy-to-let mortgage?
A buy-to-let mortgage is a mortgage arranged on a property that you want to rent out as a landlord rather than live in yourself. For this reason, you may also see buy-to-let mortgages referred to as landlord mortgages, while they are commonly abbreviated to BTL mortgages too.
Importantly, a buy-to-let mortgage shouldn’t be confused with a let-to-buy mortgage, which allows you to rent out the property where you currently live and buy yourself a new home.
» MORE: What is a buy-to-let mortgage?
How do buy-to-let mortgages work?
Buy-to-let mortgages work in a similar way to residential mortgages. So having a larger deposit or amount of equity will normally give you a better chance of securing the best buy-to-let mortgage 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 compared to residential mortgages is that buy-to-let mortgages are mainly interest-only mortgages rather than repayment mortgages. This means your monthly repayments only contribute to covering the interest on your mortgage and not any of the original loan amount – instead, you’ll need a plan for how you intend to pay this back when your mortgage term ends.
It could be you use savings or investments to settle this outright, or alternatively you may 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 – this is known as negative equity.
How much will a buy-to-let mortgage cost?
The cost of a buy-to-let mortgage will depend on a number of factors, including the mortgage rate on your buy-to-let deal, the size of the deposit you can put down, and the mortgage term you choose. A mortgage repayment calculator can give you a rough idea of the costs you may face, but a mortgage lender should provide you with a full rundown of everything you’ll need to pay before you apply.
What are the interest rates on a buy-to-let mortgage?
The interest rate you’re able to get on a buy-to-let mortgage will be influenced by your personal circumstances and the type of buy-to-let mortgage you choose. Some of the main factors include:
Your loan-to-value (LTV) ratio is the size of the mortgage you want to borrow shown as a percentage of the value of the property you’re buying. So having a larger deposit means you’ll need a smaller loan and have a lower LTV ratio. Crucially, the lowest LTVs are where you‘ll tend to find the lowest buy-to-let mortgage rates.
Buy-to-let lenders will look at your credit score and history to help them decide if you should be approved for a mortgage. If you have a good credit score, you may find it easier to get a mortgage and access the best buy-to-let mortgage rates than if your credit score is bad.
Fixed or variable rate
Take out a fixed-rate buy-to-let mortgage and your interest rate is guaranteed to stay the same for the period of time you’ve fixed. Alternatively, with a variable rate mortgage, your interest rate could change, and potentially move up or down.
» MORE: Fixed vs variable mortgages
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 may 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 let you borrow on the level of rental income your buy-to-let property is expected to deliver. Generally, buy-to-let lenders want your expected rental income to be at least 25% higher than the monthly repayments on your mortgage. However, some may want this additional coverage to be as high as 45%, to make certain you can afford a buy-to-let property.
To get an idea of how much rent you may reasonably be able to charge, you can look at online property sites or contact letting agents to find out the current rents being asked for rental properties in your area.
Our buy-to-let mortgage calculator will then allow you to get an indication of how much you might be able to borrow and the level of rental income you’ll need.
How do I get the best buy-to-let mortgage deal?
When it comes to finding the best buy-to-let mortgage deal, you need to focus on getting the buy-to-let mortgage that best meets your needs:
Think about the type of mortgage that suits you
A fixed-rate mortgage provides reassurance as you’ll know precisely what your monthly repayments will be. A variable rate mortgage, such as a tracker mortgage, could see your repayments rise or fall, but offers the potential to end up costing less overall.
Be aware of your credit score
You’ll only usually have a chance of getting the best buy-to-let mortgage rates if your credit standing is good, so check and try to improve your credit score before you apply.
Weigh up the mortgage fees
There may be charges to pay when first taking out a buy-to-let mortgage, and potentially early repayment charges if you decide to leave your deal early. Make sure you know what they all are.
Taking the time to compare buy-to-let mortgages from different lenders gives you a better chance of finding the lowest rate deals among those that are best suited to you overall.
» MORE: Current mortgage rates
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 to 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 may 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 may want to pay for a surveyor to conduct a house survey to inspect the property and check for any problems that you may need to put right as the new owner.
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. In Scotland, you’ll have to pay an Additional Dwelling Supplement, which is 6% of the total price of the property, while in Wales you would need to pay a higher rate of Land Transaction Tax.
Agency fees: If you use a letting agency to manage your rental property, it will charge fees that you’ll need to pay. A typical charge may be around 10% of the rental income you receive, but could be higher or lower.
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 on rental income 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.
Buy-to-let pros and cons
There is a lot to consider if you’re thinking about using a buy-to-let mortgage to buy a property to rent out. Some of the advantages and disadvantages of buy-to-let include:
Advantages of buy-to-let mortgages
- If you want to invest in property but can’t afford to buy outright, then a buy-to-let mortgage could provide a way of making this happen.
- There are no guarantees, but if the value of your rental property rises while you own it, there’s the potential to make a profit when it’s time to sell.
- Your tenants are effectively paying your buy-to-let mortgage for you, and if the rent is higher than your repayments, you’ll have an additional income stream too.
- Some of the expenses involved with being a landlord can be offset against income tax, including letting agency fees, council tax, and maintenance costs. A 20% tax credit relating to the interest on your BTL mortgage is available as well.
Disadvantages of buy-to-let mortgages
- You’ll usually need a deposit of at least 25% of the property value to take out a buy-to-let mortgage.
- Property prices can fall as well as rise, meaning there’s the potential to lose money on what you initially paid if you want to sell.
- If the buy-to-let mortgage you take out is interest-only, you’ll need a plan for paying the capital element of this back at the end of your mortgage term. In particular, remember that if the value of your property falls, and you’re hoping to sell it to pay back what you owe, there will be a shortfall that must be covered.
- Your buy-to-let mortgage repayments will still need to be made, even if there are no tenants in the property and you have no rental income coming in.
- The various costs of stamp duty, insurance, fees and tax can quickly add up. Paying for and arranging property repairs and maintenance is your responsibility too.
- Unless you’re willing to pay a letting agency to do the work for you, finding tenants, asking for and checking their references, and sorting the necessary paperwork is down to you.
- You may need to pay capital gains tax if you make a profit when selling a buy-to-let property.
How do I get a buy-to-let mortgage?
The process of applying for a buy-to-let mortgage may differ slightly between lenders, but generally the path is as follows:
- Get an Agreement in Principle (AIP). This can be done before you’ve found a property and will give you an indication of what you might be able to borrow. Most estate agents like to see an AIP as proof you’re serious about buying.
- Apply for a mortgage. Find the property you like and have an offer accepted, and you should be ready to begin your mortgage application.
- Arrange the legal side. A solicitor or conveyancer can guide you through the legalities of buying a property, and ensure all the relevant searches and surveys have been completed, the contracts are signed correctly, and the money is where it needs to be.
What do I need for a buy-to-let mortgage?
Similar to applying for a standard mortgage, a buy-to-let mortgage lender will want to see proof of your identity and address, evidence of your earnings from employment and other income, and details of any outstanding loans and debt that you have to your name. They will also fully examine your outgoings and the affordability of the loan.
As a minimum, you’ll usually need:
- either your driving licence or passport
- a utility bill dated within the last three months
- three to six months’ worth of payslips and bank statements, your P60, or if you are self-employed usually a minimum of two years’ accounts
- credit card and loan statements
- paperwork showing details of any existing mortgage
- evidence showing your potential rental income.
Buy-to-Let Mortgage FAQs
Generally you’ll need a minimum deposit of 25% of the property’s value to get a buy-to-let mortgage. Some lenders may allow a 20% deposit, but bear in mind that the bigger the deposit you can put down, the better your chances of accessing lower buy-to-let mortgage rates.
It may prove difficult for some people to get a buy-to-let mortgage, because you generally need to have a good credit score and a minimum 25% deposit. You also need to try and prove that your rental payments will cover 125% of your monthly mortgage repayments. Some lenders may also require that you already own your own home, or are in the process of buying one.
There is no formal limit on how many buy-to-let mortgages you can have in total, but some lenders may have a maximum number that any one borrower can take out with them.
If you intend to rent out your property to a close relative, you will need a family buy-to-let mortgage. This type of mortgage may be used if you’re a parent buying a property that your child will rent from you, or if you’re buying a home for elderly parents to live in, who will pay you rent.
It may be possible to change a residential mortgage to a buy-to-let mortgage, either by asking your current mortgage lender about swapping from one to the other, or by remortgaging to a buy-to-let mortgage from a new lender. However, if you’re considering this because you only intend to rent your home out for a short period of time, perhaps of between six and 12 months, you could ask your lender about obtaining consent to let. This allows you to retain your residential mortgage but move tenants in temporarily.
The majority of buy-to-let mortgages are interest-only, but repayment mortgage options are available too. Monthly repayments are higher with a repayment mortgage because you’re paying off your loan amount (or capital) and interest at the same time. However, if you make all of your repayments, you should own the property outright at the end of the mortgage term, as everything you owe should be paid off.
You’ll usually need at least a 25% deposit to get a buy-to-let mortgage, and there are various costs to pay related to a mortgage, and to keep your property in good repair. Typically, you’ll need an annual income of at least £25,000 to qualify, and should also think about how you’d pay the mortgage if there was a period where you couldn’t find any tenants.
Buy-to-let mortgages tend to have higher interest rates and fees than residential mortgages. Remember there are also additional costs involved with being a landlord, such as maintenance fees, letting agent charges, and higher stamp duty rates.
It is possible to get a buy-to-let mortgage as a first-time buyer but you’ll have fewer mortgage options to choose from and will probably have to provide a bigger deposit. Some lenders will only offer you a buy-to-let mortgage if you already own a home, or are in the process of buying.
If you’re buying a property with the intention of renting it out and need a mortgage to do so, you will need a buy-to-let mortgage. You’re not usually allowed to rent out a property on which there is a residential mortgage, but one exception is if your lender gives you consent to let. This is usually only granted on a temporary basis if you want to rent out your property for a short period of time, perhaps because you’re working away for a while or waiting for a property sale to complete.
This will vary between lenders but generally you can expect it to take somewhere between two to six weeks to receive a buy-to-let mortgage offer. Try to avoid any unnecessary delays by getting all of your paperwork and required documentation ready in advance, including evidence of the rental income you expect to achieve.
There are a number of reasons why you may be rejected for a buy-to-let mortgage, including falling short of income requirements, your deposit being too small, or because you’ll be outside a lender’s upper age limits when your proposed mortgage term ends. You may also be declined if your anticipated rental income doesn’t cover at least 125% of the mortgage repayments.
Tax relief specific to buy-to-let mortgages has changed so that mortgage interest payments are no longer tax deductible. Qualifying landlords will now receive a 20% tax credit instead.
Yes, it is possible to remortgage a buy-to-let property. Some landlords remortgage in order to raise the deposit that they need to buy another buy-to-let property.
Rental yield can give landlords an indication as to whether a buy-to-let property is a worthwhile investment. Essentially, it’s the rental income that you receive in a year from a property expressed as a percentage of the value of that property. So if you receive an annual rental income of £10,000 and the property is worth £200,000, the rental yield is 5% – calculated by dividing £10,000 by £200,000, and then multiplying by 100 to find the percentage.
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