Buy-to-let Mortgage Guide

Buying a property with a buy-to-let mortgage means you benefit from a regular rental income and investment for the future.

If you want to become a landlord, it’s useful to understand what a buy-to-let mortgage is and how it works.

There are also a few things to consider before you decide if property investment is the right route for you.

What is a buy-to-let mortgage?

If you buy a property to rent out, you won’t be able to buy it with a traditional residential mortgage.

Instead, you’ll need a specialist buy-to-let mortgage designed for people who buy a property to rent to tenants rather than a place to live. It should be viewed as a mid to long-term investment.

The rules around buy-to-let mortgages are similar to those for regular mortgages, but there are key differences around lending criteria, eligibility and affordability.

How does a buy-to-let mortgage work?

There are many reasons why people buy more property, whether it’s a buy-to-let, holiday let or second home.

A key decision is whether to choose a repayment or interest-only mortgage.

You can get various types of buy-to-let mortgages, such as a fixed, variable, tracker, discount or with a capped interest rate. However, most buy-to-let mortgages are interest-only.

Interest-only buy-to-let mortgages

Monthly payments are generally cheaper compared to a repayment mortgage. 

In the short term, this can reduce your monthly outgoings, but once your deal ends, you’ll have to pay off the cost of the property at the time you bought it. 

Most landlords do this by selling their property at a profit, although it might not be that simple. 

If house prices fall and the property is worth less than what you paid, you’ll have to use your money to pay off the remaining debt. 

That’s why it’s vital to have a long-term plan to pay off the loan or refinance it at the end of your mortgage term. 

Repayment buy-to-let mortgage

With a repayment mortgage, you’ll pay off the full amount you borrowed by the end of the term, so you can then: 

• Keep the property, continue renting it out and have all the income. 

• Sell it and keep the full sale amount.

A repayment mortgage costs more each month, so it may only be suitable if you can charge enough rent to cover it. 

How much deposit do I need to get a buy-to-let mortgage?

The minimum deposit for a buy-to-let mortgage can vary.

It’s usually 25% of the property’s value but could be between 20% and 40%.

So, for a property that’s £250,000, you’ll be expected to put down anywhere between £50,000 (20%), £62,500 (25%) and £100,000 (40%).

How much can I borrow on a buy-to-let mortgage?

The maximum you can borrow depends on the amount of rental income you expect.

To get an idea of how much rent you can charge, speak to a local letting agent to see how much similar properties are being rented out for.

Moneyfacts has a buy-to-let calculator that works out expected rental yield so you can see what return you might get before you apply for a buy-to-let mortgage.

For example, if a property is valued at £175,000 and you charge a monthly rent of £895, your expected yield would be 6.14%.

Lenders will look at how much rental income you’ll get from the property and compare this to your monthly mortgage repayments.

The rental income will usually need to be at least 125% of your mortgage repayment. So, if your monthly interest payments are £600, you’ll need to charge at least £750 a month in rent.

Generally, the more you’re able to charge in rent, the higher the loan you could be eligible for.

What are the lending criteria for a buy-to-let mortgage, and who can get one?

There are many rules regarding lending criteria you’ll need to become familiar with, including:

Eligibility

• Having a good credit record.

• Earning at least £25,000 a year.

• Being under a certain age. Lenders have upper age limits, which is usually that you’ll be no older than 75 when the mortgage ends, but these limits can vary by lender.

Second homes

If you’re buying a property to be used as your own holiday home, you’ll need a residential second home mortgage.

However, if you plan to let it out to generate income, you’ll need a special holiday let mortgage.

We can connect you to one of our mortgage brokers who can help you find the right deal.

Houses in multiple occupation

You can generally make a greater profit from a houses in multiple occupation (HMO), which is a house occupied by at least three people who you share toilet, bathroom or kitchen facilities with.

To do this, you’ll need a specialist HMO mortgage.

How is a buy-to-let mortgage different from a residential one?

It’s usually cheaper to get a residential mortgage than a buy-to-let one. This is because interest rates and product fees are typically lower as lenders see buy-to-let properties as higher risk.

On top of paying a larger deposit, arrangement fees could be as high as 3% to 5% of the property’s value. For example, on a property valued at £225,000 with a 3.5% arrangement fee, you’d pay £7,875.

You’ll also have to pay extra Stamp Duty or equivalent taxes for a property that is not your main home. In England and Northern Ireland, the surcharge is 3% on top of the standard residential rates. In Scotland, the Land and Buildings Transaction Tax (LBTT) surcharge is 3%, and in Wales, the Land Transaction Tax (LTT) surcharge is 4%.

What types of buy-to-let mortgage deals are there, and how can I get the right interest rate?

Most high street banks and some specialist lenders offer buy-to-let mortgages. So it’s worth looking for the right mortgage deals, such as a two or five-year fixed-rate cashback mortgages.

As with residential mortgages, you’ll be able to access better rates with a bigger deposit (usually 40% or more).

Arrangement fees tend to be higher, so when comparing deals, evaluate the overall cost of the loan, as a cheaper initial rate can sometimes be outweighed by high fees.

A mortgage broker can search a wide, broad or comprehensive range and recommend the right mortgage deal for you.