A guide to buy-to-let mortgages

Buy-to-let (BTL) mortgages are typically used by landlords who wish to purchase properties to rent out. Buy-to-let mortgages are subject to different rules than residential mortgages.

Who can get a buy-to-let mortgage?

Buying a buy-to-let mortgage is necessary if you intend to rent out your property. For many lenders, a buy-to-let mortgage is considered a higher risk, so you may need to meet certain criteria.

Lenders typically require the following:

  • Some lenders require you to have already purchased a home outright or with a mortgage
  • You should have a good credit record, and your other borrowings should not be too high.
  • It is possible that you will have to provide proof of employment earnings or earnings from self-employment separate from rental earnings. Some lenders might not approve your buy-to-let mortgage if you earn less than £25,000 a year.
  • Usually, lenders require borrowers to be at least 75 years old, though some may have a lower requirement
  • Buy-to-let mortgages require a minimum 25% deposit due to a 75% LTV limit.
  • Your borrowing capacity is determined by the amount of rent you receive or are likely to receive each month. You should be able to cover 125% of your mortgage payments with your rental income 

How do buy-to-let mortgages work?

In most cases, buy-to-let mortgages are interest-only loans. You will only pay interest on your mortgage each month, and no capital. Although you will be able to reduce your monthly outgoings in the short term, you must make sure you have a plan to repay the full loan or refinance at the end of your mortgage term.

There are some key differences between buy-to-let mortgages and ordinary mortgages:

  • A higher fee is usually charged.
  • Buy-to-let mortgages usually have higher interest rates.
  • Buy-to-let mortgages require a minimum deposit of 25% of the property’s value (although it can vary between 20-40%).
  • The majority of BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA). Nevertheless, there are exceptions, such as when a property is rented to a close relative (such as a spouse, civil partner, child, grandparent, parent or sibling). As with residential mortgages, consumer buy-to-let mortgages are assessed based on strict affordability rules.

How to compare buy-to-let mortgages

The overall cost of a mortgage must be considered when comparing mortgage deals, because a low initial rate can sometimes be outweighed by high fees.

Mortgage fees on buy-to-let mortgages are often significantly higher than on residential mortgages, with figures as high as £1,999 not uncommon. There are lenders who charge set fees and others who charge a percentage of the loan amount, such as 0.5%.

Landlord affordability rules

Landlords can find plenty of attractive mortgage offers, but you will have to meet strict affordability requirements. A tougher lending policy has been implemented by the Bank of England in recent years to cool the overheated buy-to-let market.

Buy-to-let mortgages for first-time buyers

Buying an investment property elsewhere and renting it out might be the answer if you’re struggling to get on the property ladder in your area. There is good news for first-time buyers – but obtaining a buy-to-let mortgage may not be straightforward.

The number of mortgages available to you will be significantly smaller, so you may need a larger deposit than other investors. As a first-time buyer, you will also lose out on some benefits – especially when it comes to stamp duty. First-time homebuyers cannot qualify for first-time buyer relief if their first property is not one they will live in themselves.

As a first-time buyer, you won’t pay as much as someone buying a buy-to-let. Instead, you will be charged the ‘home mover rate’, which is the same rate as someone buying a home to live in.

The buy-to-let/second home surcharge applies if you later sell your buy-to-let property and buy a second home for personal use. Also, if you have a buy-to-let mortgage outstanding, you might find it more difficult to get a mortgage when you buy your first home for yourself.

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