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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 a home loan that allows you to purchase a property you’re planning to rent out to tenants. Lenders won’t let you rent out a property on a residential mortgage because of the greater risks associated with being a landlord. That means it’s really important to make sure you have the right type of deal for your needs.
While buy-to-rent mortgages have some similarities to residential mortgages there are also key differences. For instance, you typically need a higher deposit than you do when buying your own home and you might have access to interest-only deals when getting a buy-to-let mortgage. Also, mortgage lenders take potential rental income into account when deciding how much money they are willing to lend you.
Read this guide to learn everything you need to know about buy-to-let mortgages, including what to look for when choosing a provider and how to compare offers and get the best deals.
How does a buy-to-let mortgage work?
Just like a standard residential mortgage, the first thing you need for a buy-to-let mortgage is a deposit. While potential homeowners may only need to have 5% of the purchase price to get on the property ladder, you need a lot more cash up front for a buy-to-let property. The minimum you need varies depending on the provider, but ranges from 20-40%, with most asking for at least 25% as a deposit.
The next thing to consider is what kind of mortgage you want: interest-only or capital repayment. Most residential mortgages tend to be on a capital repayment basis, which means you pay back a chunk of the loan and the interest each month. With these mortgages, you own the property outright at the end of the term.
Buy-to-let landlords can get repayment mortgages, but they also tend to have interest-only options available because the property is an investment rather than their home, making it easier to sell at a later date.
An interest-only mortgage is when you only pay back the interest each month. At the end of the mortgage, none of the capital that you borrowed has been repaid. Some borrowers save up or invest the income received from the rent to help pay back the mortgage at the end of the term, others choose to remortgage or sell up to repay the capital.
Most buy-to-let mortgages tend to be repaid on an interest-only basis.
Buy-to-let mortgages are available as fixed, discounted and tracker deals and arrangement fees are normally around 1.5% to 2%.
How to compare buy-to-let mortgage rates
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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 70–75.
Income: You may need to meet a certain income threshold, often at least £25,000 per year. This may be higher depending on the value of the property.
Deposit: You’ll need a higher deposit to become a buy-to-let landlord. The minimum is usually 20%–40% of the purchase price, but 25% is most common. The bigger your deposit, the better the deals you’ll be offered.
Rental income: The rental income for the property will need to at least cover the mortgage interest payments, but many lenders will want a buffer. Some lenders want the rental income set at 145% of the repayment figure for higher-rate taxpayers.
Credit history: Lenders need to know that you’re a responsible borrower, so a good credit rating is crucial for buy-to-let landlords. The better your score, the more providers will want to deal with you. This means you will have access to more deals with better rates.
How much will my buy-to-let mortgage cost?
The cost will depend on a variety of factors, including the value of the property and the rates you’re offered. Here are some of the main factors to consider:
Deposit
You need a deposit of at least 20% 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. If you opt for a fixed-rate loan, the interest will typically be 1% higher than for equivalent mortgages.
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?
Letting agent fees
If you use an agent, they will typically charge 15-20% of the rental income. 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. If you’re buying a second home, you pay a 3% surcharge. Most buy-to-let landlords already own their own homes, so will pay the higher tax on new property. However, if your buy-to-let property is the only home you own, for instance, because you rent or are a first-time buyer, then you don’t have to pay this.
First-time buyers typically get a Stamp Duty discount on properties worth less than £500,000. However, if your first property is a buy-to-let, you will miss out on the discount and pay normal stamp duty. You can find out all the stamp duty levels on the gov.uk website.
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.
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.
The right mortgage rate is key to any buy to-let investment. In the current market, it can quite literally pay to get expert advice on the buy to let mortgage market”Claire Flynn, Senior Content Editor - Mortgages
