Buy-to-let mortgages

What's a buy-to-let mortgage?

A buy-to-let mortgage is where you borrow money from a lender to buy a property that you let out.

Interest rates are often higher than for other types of mortgages. This is because buy-to-let mortgages are higher risk for lenders, as there may be periods with no tenants in the property and therefore no rental income for the borrower.

Fees for buy-to-let mortgages can be higher too and you'll usually need to provide a bigger deposit.

Make sure you factor in all these costs when deciding whether buy-to-let is for you.

Most buy-to-let mortgage lending is not regulated by the Financial Conduct Authority (FCA).

Buy-to-let mortgage types

There are a few types of buy-to-let mortgages:

And there are a few ways you can choose to pay your buy-to-let mortgage:

How does a buy-to-let mortgage work?

You’ll need to save up a deposit. Deposits are between 20% to 40% of the property’s value, but usually around 25%.

How the repayments work depends on the type of buy-to-let mortgage you have. Most buy-to-let mortgages are interest-only, but you can also get them on a repayment basis.

What are the criteria for a buy-to-let mortgage?

Lenders will take a few things into account when deciding whether you’re eligible for a buy-to-let mortgage:

Income

Although buy-to-let mortgages depend more on your rental income, you’ll probably need to declare a minimum salary.

This is so the lender knows you have income to fall back on if your rental income doesn’t fully cover the mortgage repayments.

Previous experience

If you haven’t been a landlord before, not all lenders will offer you a buy-to-let mortgage.

Some lenders might consider you if you’ve rented out your former home on consent to let. But others will only be interested if you’ve had a full buy-to-let mortgage in the past.

Rental income

Your rental income will usually have to cover more than the cost of the mortgage repayments. Many lenders ask for the rent to be at least 125% of the monthly mortgage payments.

Other property

Most lenders impose a maximum number of mortgaged buy-to-let properties you’re allowed to have, which is typically four.

There might also be restrictions that involve any mortgaged residential properties you may have. For example, lenders may not allow a buy-to-let mortgage on a property that has a higher value than your residential property.

How much can you borrow for buy-to-let mortgages?

The way this is calculated is slightly different from a residential mortgage. It will depend on your lender and your own circumstances.

Loan to value

The loan to value is the amount you need to borrow (loan) out of the total cost (value) of the house purchased. For most buy-to-let mortgages you’ll need a substantial deposit, usually around 25%. So in this case the loan to value would be 75%.

Some lenders offer a higher loan-to-value, but these deals may be thin on the ground - you could speak to a mortgage adviser to find out what you might be eligible for, and for help applying for a mortgage. You'll usually have to pay for mortgage advice.

Rental income

Buy-to-let mortgages don’t follow the same affordability rules as residential mortgages. Instead of the amount you can borrow being based on your salary and expenses, it’ll be based on the rental income your property can achieve.

As we mentioned above, most lenders will want the monthly rental income to cover 125% of the monthly mortgage cost. Some lenders will base this on a repayment mortgage amount, even if you’ve taken an interest-only product.

A mortgage adviser can help calculate how much you might be able to borrow by looking at your individual circumstances.

Making buy-to-let pay off

To make a success of buy-to-let, you’ll need to consider more than just the mortgage. There are other taxes and expenses you’ll come across as a landlord.

Tax

Your rental income is subject to income tax and the rate you pay will depend on your overall income (including your salary from any other jobs you have).

There are a number of expenses that landlords can set against tax, which used to include the interest and fees you pay on your buy-to-let mortgage.

However, this tax relief started being phased out back in 2017 and was replaced in 2019 by a tax credit equivalent to basic-rate tax.

This is likely to affect all landlords with a buy-to-let mortgage, but higher and further rate taxpayers will be particularly affected by the changes.

Remember too that if you sell your rental property you’ll probably be subject to capital gains tax.

You’ll have a personal allowance, letting relief and you may also have some tax relief if the property has been your own home at any time, but the calculations for capital gains tax can be complex.

Tax rules can change. And their benefits will depend on your individual circumstances. To help calculate your tax and make the most of any allowances and tax relief, you might want to consider employing the services of an independent financial adviser.

Stamp duty

Landlords pay an extra 3% stamp duty compared with the rates charged for each tier for residential buyers.

Agency fees

Unless you plan to be a very hands-on landlord, you’ll probably have to pay letting agency fees for at least some services.

There are different levels of agreements, from simply advertising the property and conducting the initial tenant checks, to fully managing the property for the duration of the tenancy.

A fully managed agreement might typically be 10-15% of the rental income plus VAT, with annual fees on top.

Repairs and maintenance

Set aside some of the monthly rent in an easy-access savings account or high-interest current account so you’ve got cash available quickly for maintenance and repairs.

A high-interest current account can be a particularly convenient home for an emergency fund, because you’ll have a debit card to pay any expenses as and when they occur.

How to get started with a buy-to-let mortgage

Work out whether you can afford to invest in property and if it's right for you.

If you go ahead, choose a property that's within your budget, desirable to renters and likely to make you a profit.

Compare a range of mortgages, including buy-to-let ones to see which is the most suitable.

Get advice from an independent financial adviser or mortgage broker if you need help.

What’s the difference between a buy-to-let and residential mortgage?

If you want a mortgage to buy a rental property, you need a buy-to-let mortgage.

Don’t be tempted to get a residential mortgage instead. Even if your application were successful (which is unlikely) you’d be committing mortgage fraud and breaking the terms and conditions.

That could have dire repercussions, including the lender demanding that you repay immediately and in full.

There is one exception to this. If you want to move house and let out your former home, some residential mortgage lenders will grant you consent to let.

Consent to let gives you permission to legally rent out your property, but usually only until the end of your current mortgage deal. After that you’ll be asked to take out a buy-to-let mortgage if you want to keep renting out your property.

There’s usually a fee for consent to let and sometimes your interest rate will be increased, too.

What happens at the end of my interest only buy-to-let mortgage?

Once your initial buy-to-let mortgage deal ends, you’ll be put on the lender’s buy-to-let standard variable rate (SVR).

This can be very costly. When you near the end of your initial buy-to-let mortgage deal, it’s a good idea to start looking around for a remortgage deal.

You might want to remortgage simply to get a better deal, or to take out further borrowing - perhaps to improve your rental property or as a deposit towards another one.

Most lenders will allow you to secure a remortgage deal as much as six months before your current product ends.

Why are buy-to-let mortgages usually interest only?

Mostly because the monthly repayments are lower, which increases the amount of profit from rental income.

Can I take out a buy-to-let mortgage for a holiday home?

No. Instead you’ll need a specific holiday home mortgage which - unlike buy-to-let mortgages - often requires you to have a high minimum income of your own.