Buy-To-Let Mortgages – July 2022

If you’re buying a property to rent out, you’ll need a buy-to-let mortgage – unless you’ve enough cash set aside to buy outright. Buy-to-let mortgages come with several key differences to residential mortgages (a loan against a property you live in). So, if you’re considering becoming a landlord, it will help to get to grips with the basics first.

Buy-to-let versus consent-to-let

A buy-to-let mortgage is a special type of mortgage designed for investors who want to let out a property to tenants.

However, if you’re letting a property over the short-term that’s once been your main home, you may not need a buy-to-let mortgage. In this scenario, you’d need to apply for a ‘consent to let’ from your lender. 

This is effectively a permission to rent out the property on a temporary basis. It could be, say, two or three years, or the time remaining on your current mortgage deal. When this ‘grace period’ expires, you’ll need to switch to a buy-to-let mortgage.

Lenders require you to take out a buy-to-let mortgage to reflect certain additional risks that come with renting out a property – the main one being that you will be unable to pay the mortgage because your tenants default on the rent or you can’t find tenants and the property is empty for a period.

There’s also a risk that the property may not be cared for in the same way – either by the tenants because they don’t own it, or even by the owner because they don’t live there.

What kind of mortgage can I get?

To see what kinds of buy-to-let mortgage deals are available on the market, tick the buy-to-let box and then tailor the results according to your preferences – for example, a fix or a tracker deal.

How does a buy-to-let mortgage work?

Here are the key ways a buy-to-let mortgage works differently to a residential one:

Interest-only: Buy-to-let mortgages are taken out on an interest-only basis. So, you’ll only pay the interest on your mortgage, and the repayments won’t be gradually whittling away your original loan (the ‘capital’). 

As with any other interest-only mortgage, you’ll need a plan to repay the mortgage at the end of the term – for example, by selling the property, or using savings to pay off the debt.

Proof of rental income: Alongside some of the general credit checks required for taking out a mortgage, you’ll be asked for proof of how much rental income you expect to receive from the property. 

Bear in mind that this typically needs to cover between 125% and 145% of your mortgage interest, under what’s known as ‘rental cover’. This means the monthly rent must be greater than your monthly mortgage payments.

For example, if the monthly interest payment is £1,000 for your buy-to-let mortgage, the rent you receive must amount to at least £1,250 a month.

However, the exact criteria will depend on the lender. Rental cover will also be ‘stress tested’ against higher interest rates than you see on the mortgage, (up to around 5.5%) when it comes to assessing your affordability. Again, specific tests will vary according to the lender.

Higher costs: You’ll usually pay higher arrangement fees for a buy-to-let mortgage, of 2% or more of the mortgage amount. This can add up to a significant sum, so factor these into your costs. 

Interest rates on buy-to-let mortgages are also typically higher than for a standard residential mortgage, although they have been coming down over recent years.

Other upfront costs are higher, too, as you’ll typically need to stump up a deposit of at least 25% of the property’s value. And, just as with standard mortgages, the cheapest rates are for those with large deposits of 40% or more of the property’s value.

Property portfolio: If you’re an experienced investor with a portfolio of properties that you rent out you may be asked for details of these by a lender, including a business plan. However, if you’re using a mortgage broker this is the kind of thing they can help with, so it needn’t be a headache.

Who can get a buy-to-let mortgage?

The specific criteria depends on the lender, but as a rule, your personal circumstances will need to fall into the following scenarios:

• You earn £25,000 or more a year, and already own a home, either mortgaged or outright
  
• You are relatively debt-free, and have a good credit score
  
• You are within the required age restrictions. Lenders typically have upper age limits for when the mortgage must be repaid, which may fall around 70-75, for example. So, if you’re 55, you may struggle to take out a 25-year buy-to-let mortgage. That said, some lenders have been increasing their age limits to enable older borrowers to take out a mortgage.

How much can you borrow?

As a starting point, lenders will look at the rent you expect to achieve when you come to rent out the property. This will be used to calculate how much they’re willing to lend you. And, the higher the rent you receive, the more you can borrow. 

Other factors such as your credit record, income, and any other major household bills may also be considered, depending on the lender’s particular criteria.

Working backwards you can get a rough idea how much you can borrow. This means finding out how much rental income you’re likely to receive by comparing similar properties in the area, and asking estate agents. 

Just keep in mind that your rental income will need to cover between 125% and 145% of your mortgage interest. However, this is just a starting point and your lender may use other criteria to work out how much you can borrow.

Similarly to any other mortgage, your deposit will also impact how much you can borrow – as this will affect the loan-to-value (how much you’re borrowing compared to the property’s value). 

For example, if you want to borrow £150,000 against a property valued at £200,000, this equates to a loan-to-value of 75%, which means you’d put down a 25% deposit.

How do you find the best buy-to-let mortgage?

There is a whole raft of buy-to-let mortgage deals on offer from lenders in the market. Once you’ve grasped the basics, and how much you’re looking to borrow, you can search online to find the best deal.

However, many investors find it easier to enlist the help of a mortgage broker, many of whom do not charge the customer a fee. Some buy-to-let deals are also only available through a broker, and not direct from a lender.

Check however, that the broker is independent and scouring the whole of the market for the best deal, rather than just a limited panel of lenders.

Even once you have secured the best mortgage deal, remember to factor in additional costs. These might include letting agent fees, cash for any repairs on the property before it’s rented out, and stamp duty (which is payable at higher rates when buying ‘additional properties’ that you do not live in).