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Buy-to-let mortgages
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What is a buy-to-let mortgage?
A buy-to-let mortgage is used to purchase a property you’re planning to rent out to tenants. According to recent mortgage statistics, around 13% of the gross mortgage advances for 2022 were due to buy-to-let mortgages.
If you’re taking on a property to rent out permanently as an investment, lenders will require you to have a buy-to-let mortgage, rather than a residential mortgage.
A consent to let from your existing lender gives you the opportunity to rent your home to tenants on a shorter term basis, which can be helpful for those who travel regularly for work, for example. This is only available if you already have a residential mortgage, however, to purchase a new home solely to rent out, you will need to find a suitable buy-to-let product.
How does a buy-to-let mortgage work?
There are some similarities with residential mortgages, however, there are also a number of key differences. The biggest difference is in the way that the mortgage is calculated. With a buy-to-let, your borrowing is based on what you’re likely to make from letting out the property (also known as the rental yield). Some lenders will also consider your personal income alongside the rental yield, but it will depend on your circumstances.
Another difference with buy-to-let is that you will need a much larger deposit than you would when you buy a residential home. While residential buyers can get a mortgage with as little as 5% of the purchase price as a deposit, the minimum you need for a buy-to-let property ranges from 20-40%, with most lenders asking for at least 25%.
The repayments on a buy-to-let mortgage are typically interest-only, however, it’s possible to find buy-to-let deals with repayment terms, if you would prefer to reduce the loan amount each month. Most buy-to-let owners opt for an interest-only mortgage, which is where only the interest is paid each month and the capital (the amount they borrowed) is repaid at the end of the mortgage term.
You will need to have a repayment plan in place in order to cover this end of term capital payment, and most landlords sell the rental property for this purpose. In order to approve an interest-only mortgage, lenders will need to be confident that your capital repayment plan, which could also be savings or investments, is suitable.
Buy-to-let mortgages are available as fixed-rate mortgage and variable-rate mortgage deals (such as discount and tracker rates), so you'll need to decide what works best for you. A fixed-rate deal means your interest rate is locked for a specific period of time, while the interest rate on a variable rate deal is subject to change.
It's important to note that buy-to-let mortgages are not regulated by the Financial Conduct Authority (FCA) by default, unlike residential mortgages. It’s possible to get a regulated buy-to-let mortgage in very specific circumstances, and this is usually only if you plan to let out your rental property exclusively to family members.
You're also unable to live in a property with a buy-to-let mortgage on it - even during the renovation period.
Tom Clayton, Mortgage Expert at Mojo Mortgages, said: "We’re seeing more flexibility within the buy-to-let mortgage industry, with an increasing number of lenders offering more options within the buy-to-let space."
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Who is eligible for a buy-to-let mortgage?
Just like with any mortgage or financial loan product, you need to meet the lender’s eligibility criteria to secure a buy-to-let deal. There are several factors to consider:
Minimum age: Many lenders have a minimum age requirement for buy-to-let mortgages, which is usually 21 or 25
Maximum age: There may also be maximum limits, which means that you can’t be over a certain age when the mortgage term ends – usually 70 to 75
Home ownership status: Some lenders are reluctant to lend to those who don’t already own a home, so if you’re looking to get a buy-to-let mortgage as a first time buyer, it can be more difficult to find a suitable lender, but it’s certainly not impossible
Minimum income: You may need to meet a certain income threshold, often at least £25,000 per year. There are lenders that have no minimum income requirement for buy-to-let mortgages, however
Deposit: You’ll need a higher deposit to become a buy-to-let landlord. Lenders usually require at least 25% of the purchase price, but you might get a deal with a 20% deposit, while some lenders may ask for a bigger deposit of 40%
Rental income: The rental income (or rental yield) is what your loan figure will be based on, but rather than simply being enough to cover it, most lenders will expect this income to cover at least 125% of the repayments. For portfolio landlords (those who have four or more mortgaged buy-to-let properties), rental income may need to be as high as 145% of the monthly mortgage payments
Credit history: A good credit rating is crucial for all mortgage borrowers, and the better your score, the greater choice of providers and better rates of interest you will have available to you.
How much will my buy-to-let mortgage cost?
There are a number of factors, that will affect the cost, including the size of the loan, interest rates and size of your deposit:
Deposit
You need a deposit of at least 20 to 25 of the total value of the property. However, the best deals are available for buyers who have 40% or more saved. This means that for a property worth £300,000, you need at least £60,000 to find any deal and more than £120,000 to get the best rates.
Interest rates
Interest rates vary significantly depending on factors such as the value of the property, your credit rating, the size of your deposit and what kind of mortgage you choose. It's worth speaking to a mortgage broker for help with finding the most suitable mortgage rate for you.
Loan term
If you opt for an interest-only mortgage, you need to pay back all the capital at the end of the term. Some landlords save up so they can afford to do this or have other investments they can use. If you don’t have the funds, you need to remortgage or sell the property to pay back the debt.
What additional fees do I need to pay on a buy-to-let property?
The fees involved with arranging a buy-to-let mortgage can be slightly higher than they are for a residential purchase, as this is seen as a commercial transaction. That said, the types of costs involved are largely the same, and include:
Arrangement Fee
Valuation fees
Legal Fees and conveyancing
There are additional costs involved with becoming a landlord that you may also wish to consider, however, before you take on a buy-to-let property:
Letting agent fees
If you use an agent, they will typically charge you 15 to 20% of the rental income to manage the property. In return, you reduce the hassle and leave the day-to-day dealings with your tenant to them. You need to weigh up whether the fees are worth it, or whether you’d prefer to manage the property yourself.
If you’re not going to use a letting agent, remember maintenance, viewings, posting ads and collecting payments all take time. It could also make finding and vetting the right tenant a little harder, which may cause you problems down the line if they struggle to pay the rent or fail to maintain the property properly.
Stamp Duty
When you buy a property in the UK, you must pay Stamp Duty - the amount depends on the property price and where you're buying it. If you’re buying a second home in England or Northern Ireland, you pay a 3% surcharge in addition. In Scotland and Wales, it's a 4% surcharge.
Most buy-to-let landlords already own their own homes, so will need to pay the surcharge on the new property. It's important to be aware of how much Stamp Duty you need to pay when buying a property so you can budget accordingly.
Maintenance costs
You need to make sure you can cover all the costs of maintaining the property. Buying somewhere run-down or with a big garden will increase those maintenance costs.
A new build may have less maintenance, but the list price can sometimes be inflated, so consider what tenants are likely to be willing to pay to rent your property versus the day-to-day cost of running it.
Income tax
The money you get from renting out your house is subject to income tax. This will be charged at your marginal rate. However, you can reduce the tax burden by claiming allowable expenses, including interest on the mortgage, council tax, ground rent and property repairs.
Capital gains tax
If you decide to sell the property on and are able to make a profit from the sale, you will also need to pay capital gains tax on the profitable element of the sale price. It’s worth speaking to a tax specialist before you take the leap into being a full time landlord.
Building and landlords’ insurance
Whilst your tenants will need to arrange their own contents insurance, as a landlord, it’s your responsibility to pay for buildings insurance to cover any structural issues. You may also want to look into landlords' insurance, which can protect your income in the event of tenant-free periods, or if you have tenants who get into financial difficulties.
Claire FlynnThe right mortgage rate is key to any buy to-let investment. In the current market, seeking expert advice from a mortgage broker when it comes to your buy-to-let purchase can be invaluable. ”
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