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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. If you’re taking on a property to rent out permanently as an investment, lenders will, therefore, require you to have a buy-to-let mortgage, rather than a residential mortgage.
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 loan amount is calculated. With a buy-to-let, your borrowing is based on the income you’re likely to make from letting out the property (also known as the rental yield). Some lenders may also consider your personal income alongside this, depending on your circumstances.
Another difference with buy-to-let is that you will need a much larger deposit than you would to buy a residential home. Whilst residential buyers can get a mortgage with as little as 5% of the purchase price as a deposit, the minimum deposit you need for a buy-to-let property ranges from 20-40%, with most lenders asking for at least 25%.
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, when you plan to let out your rental property exclusively to close family members.
You're also unable to live in a property with a buy-to-let mortgage on it - even during the renovation period.
How does a buy-to-let mortgage work?
Buy-to-let mortgages are generally offered on an interest-only mortgage basis, which means only the interest is repaid each month and the capital (the amount borrowed) is repaid at the end of the mortgage term. It’s also possible to find buy-to-let deals with capital repayment terms, however, these are less common.
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."
With an interest-only mortgage you’ll need to have a repayment plan in place to cover the end of term repayment of the capital. Most landlords sell the rental property for this purpose, however, you can also use savings or investments, depending on the preferences of the specific lender.
Like most mortgages, you can get buy-to-let as a fixed-rate mortgage or a variable-rate mortgage deal (discount or 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 variable rate deals is subject to change.
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Who are buy-to-let mortgages for?
Buy-to-let mortgages are solely for landlords who are looking to make an income from rental property. Whether you’re looking to invest in a single rental property or build up a portfolio, buy-to-let mortgages are the only mortgage type suitable for letting out a property to tenants on an assured shorthold tenancy agreement.
If you’re planning to rent out properties in shorter bursts, but still for profit, such as with a holiday home, you will need a holiday let mortgage, rather than buy-to-let.
If you need to let out your home on a shorter term basis, to keep the mortgage paid and the property occupied, rather than to make a profit, then a consent to let may be more suitable. A consent to let is permission from your existing lender to rent out your home to tenants on a short term basis whilst you have a residential mortgage in place. This will usually be for six-12 months at a time and can be helpful for those who travel regularly for work, for example.
Who is eligible for a buy-to-let mortgage?
Just like any mortgage or financial loan product, you will need to meet the lender’s eligibility criteria to secure a buy-to-let mortgage deal. There are several factors to consider:
Minimum age: Many lenders have a minimum age requirement for buy-to-let mortgages, 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 – although this can be a little more flexible in the buy to let market than for standard residential homes
Home ownership status: Some lenders are reluctant to lend to those who don’t already own their own 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 mortgage 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 strong credit rating is important 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
Property type: Some lenders prefer not to lend on certain types of rental property, so if you’re looking for a mortgage for a student let or another type of HMO (house of multiple occupancy) property, you may need to seek out a lender with a little more flexibility around rental types
How much can I borrow with a buy-to-let mortgage?
The loan size is typically based on the potential rental income from the property that you’re buying, so it really depends on the property itself with this type of mortgage, rather than personal income. That said, you will still need to have an income assessment to ensure that the lender is confident that you will be able to repay the loan when you have no tenants.
An ARLA registered letting agent should be able to advise you about local rental property prices in the area you’re looking to buy, or you could research this on property rental sites, such as Zoopla.
How much will my buy-to-let mortgage cost?
There are a number of factors, that will affect the cost of your buy-to-let mortgage, including the size of the loan, interest rates and size of your deposit:
Deposit - You need a deposit of at least 20-25% 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
Capital repayment - 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
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 whether you opt for a fixed or variable rate deal.
“There has been more interest in variable rates from buy-to-let investors, who are looking at the difference in price compared to a fixed-rate deal. When they consider how much rates would have to increase to justify opting for a fixed-rate deal, some believe it will be more cost-effective to choose a variable-rate. However, this is dependent on the borrower’s attitude to risk - for many a fixed deal will give them the peace of mind they prefer.”
Ron Ogbue, Mortgage Expert at Mojo Mortgages
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.
Additional stamp duty
When you buy a property in the UK, you will usually need to pay stamp duty, although this depends on the value of the property. If you already own a residential home, then any buy-to-let purchases will be classed as a second home.
In England and Northern Ireland, you will pay a 3% surcharge and in Scotland and Wales, a 4% surcharge on the standard stamp duty tax charges for second homes and any additional homes purchased.
It's also worth noting that if you purchase a buy-to-let property as a first-time buyer, you will not be eligible for the stamp duty relief that is extended to first-time buyers buying a residential property.
Maintenance costs
You'll need to make sure you can cover all the costs of maintaining the property. Buying somewhere run-down or with a big garden will, of course, increase those 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.
There are also a number of regulations that you will need to comply with in order to offer your property for let, some of which will require certificates from professionals, such as gas safety etc, so there will be costs involved in obtaining them.
Income tax
The money you get from renting out your house is subject to income tax. This will be charged at the rate applicable to your overall income level. You may want to consider a limited company buy-to-let mortgage in order to take advantage of the tax benefits this can offer landlords.
Capital gains tax
If you decide to sell a rental property on and 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 becoming 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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