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YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
The FCA does not regulate mortgages on commercial or investment buy-to-let properties.
A buy-to-let mortgage is used to purchase a property you plan to rent out to tenants. There are a number of key differences from a standard residential mortgage:
Borrowing is based on the income (or yield) you'd make from letting out the property. Some lenders may also consider your personal income alongside this
You'll need a much larger deposit than you would to buy a residential home of between 20-40%, with most lenders asking for at least 25%
You're unable to live in a property with a buy-to-let mortgage - even during the renovation period
Buy-to-let mortgages are not typically regulated by the Financial Conduct Authority (FCA) but it's possible to get a regulated buy-to-let mortgage in specific circumstances, such as renting to family members
Buy-to-let mortgages are generally offered on an interest-only mortgage basis, so only the interest is repaid each month - the capital (amount borrowed) is repaid at the end of the mortgage term. It’s possible to find buy-to-let deals with capital repayment terms, but 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 a repayment plan in place to cover the final sum repayment. Most landlords sell the rental property, but you can also use savings or investments, depending on the preferences of the specific lender.
Buy-to-let mortgages can be taken as a fixed-rate mortgage or a variable-rate mortgage deal (discount or tracker), so you'll need to decide which works best for you.
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
Loan size is typically based on the potential rental income from the property that you’re buying, so it depends on the property itself, rather than your personal income. That said, you'll still have an income assessment to ensure you'll be able to repay the loan when your property is vacant.
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.
The interest rate available to you will vary based on a number of factors, including the loan to value (LTV) of your borrowing and how well you meet the criteria outlined above.
Another important factor, of course, is what rates are available on the market. These obviously differ between lenders, but also tend to differ depending on the product type. Below we have highlighted the cheapest buy-to-let mortgage rates currently available on a two-year fixed rate buy-to-let deal.
|Lender type||Current average rate||Current lowest rate|
|Across all lenders||5.62%*||3.94%*|
|Big 6 lenders||5.39%*||4.99%*|
*THESE BUY-TO-LET MORTGAGE DEALS MAY NOT BE AVAILABLE AT THE TIME YOU ARE READY TO SUBMIT AN APPLICATION
The rates available on different lengths of fixed-rate deals and variable rate deals, such as tracker mortgages, typically differ to the above. Speaking to a whole-of-market mortgage broker can help you find the best buy-to-let mortgage rate for you and your circumstances.
There are a number of factors, that will affect the cost of your buy-to-let mortgage, including the size of the loan, your interest rates and size of your deposit:
Deposit - You need at least 20-25% of the total value of the property, but the best deals are available to those with 40% deposit or more. So for a property worth £300,000, you need at least £60,000 and more than £120,000 to get the best rates
Capital repayment - Most buy-to-let mortgages are interest-only mortgage, so you'll need to repay all of the capital (amount borrowed) at the end of the term. Some landlords use savings or investments but others 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 and what's available on the market at the time
“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
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:
Legal fees and conveyancing
There are also additional costs involved with becoming a landlord that you may wish to consider:
If you use an agent, they will typically charge 10 to 20% of the rental income as a fee to manage the property. In return, you leave the day-to-day dealings with your tenant to them, reducing the time and effort required.
If you’re not going to use a letting agent, remember that 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.
When you buy a property in the UK, you usually need to pay stamp duty, although this depends on the value of the property and your buyer status. If you already own another property (including your own residence), any buy-to-let purchases will be classed as a second or subsequent homes for Stamp Duty purposes.
In England and Northern Ireland, you pay a 3% surcharge and in Scotland and Wales, a 4% surcharge in addition to the regular 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 won't be eligible for the stamp duty relief that first-time buyers buying a residential property have.
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'll need to comply with in order to legally offer your property for let. For example, certain professional certifications, such as gas safety will be needed.
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 to take advantage of the tax benefits this can offer landlords.
If you decide to sell a rental property and you make any 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.
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.
Securing the best rate for your buy-to-let mortgage is an easy way to ensure you're maximising profit. In today's turbulent market, a broker is an excellent resource for those looking to make the most of their portfolio.”Kellie Steed, Mortgage Content Writer
A residential mortgage is a loan you get to buy a property that you’ll live in yourself. A buy-to-let mortgage is when you borrow money for a property you wish to rent out to tenants.
Most lenders require a deposit of at least 20% for a buy-to-let property, however, many ask for 25% and some as much as 40% minimum deposit. The higher your deposit, the better interest rates you will get, so it’s usually worth paying more than the minimum if you can.
As with any mortgage, the interest rates available to you will depend on the deposit you provide, your credit history, whether you opt for a fixed or variable rate product, and of course, the specific lender.
To make the most of your investment, speak to an expert to make sure you’re getting the best deal for your circumstances.
Most landlords opt for interest-only and use the rental income to invest or save, choosing to pay back the entire mortgage later. If you take this approach, you must make sure you have a payment plan to cover the whole mortgage back when the mortgage term ends, as the lender will want to be confident you will be able to repay the loan.
If you choose a repayment mortgage, which is usually used to buy a residential home to live in, you’ll own the property outright at the end of the deal, but your monthly repayments will be higher.
You will need to repay the loan capital (the full amount you borrowed) at the end of the mortgage term, as you will have only paid the interest. Lenders will expect you to have a plan in place for this when you take out the mortgage, and it often involves selling the rental property on.
It’s important to consider that if the cost of your property drops, then the resale income may not necessarily cover what you have borrowed. A back up plan is always a good idea, no matter how you plan to repay the capital.
There is no limit to the number of buy-to-let mortgages you can haven assuming you’re able to meet affordability for them all. That said, some lenders are reluctant to lend to portfolio landlords (those with more than 4 active buy-to-let mortgages) and it will get more difficult to borrow, the more properties you own.
There are specialist lenders that are able to accommodate portfolio landlords, however, and they are often happy to use existing investment properties in place of, or addition to the deposit, in order to secure your borrowing.
Yes you can, it’s possible to remortgage a residential property onto a buy-to-let mortgage, so long as the lender feels that both yourself and the property meet the criteria of buy-to-let lending.
It’s also possible to use a let-to-buy arrangement, which is where you take out 2 mortgages simultaneously. This involves remortgaging your current home to a buy-to-let so that you can retain it as an investment property, whilst taking out a new mortgage to buy another residential property to live in.
No you can’t, residential mortgages are intended for the purchase of a home you are going to live in yourself. If you choose to disregard the terms of your mortgage and let out a property that has a residential mortgage without speaking to your lender, you’ll be committing ‘mortgage fraud’. In these circumstances, it’s possible that your lender will demand that the mortgage is repaid immediately, or repossess the property if you’re unable to do so.
If you would like to try out being a buy-to-let landlord with your residential home before committing to it for the long term, however, it’s possible to look at getting a consent to let on your residential mortgage. This will give you a short term (usually 6-12 months) allowance to let out your home before you need to remortgage onto a buy-to-let product.
It really depends on how you intend to offer your home on AirBnB, but you may not always need a buy-to-let mortgage. Some lenders will allow you to rent a certain element of your home, perhaps a room or two on an AirBnB basis with a standard residential mortgage, so long as you keep to their terms regarding the maximum number of days per year you can do this.
It’s very important to speak to your lender first, however, as with many residential mortgages, this will be breaching the terms and conditions.
Whether you need a holiday let mortgage or a buy-to-let mortgage will depend on if you intend to offer your property as a whole, how long you intend to let it out to any one individual and how many maximum days you will offer your property to let throughout the year.
Buy-to-let mortgages are solely for landlords 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.