Investing in a buy-to-let mortgage

If you want to buy a property to rent out, a buy-to-let mortgage is a must. This checklist is designed to give you the lowdown on everything you need to know from choosing the right property to tax implications.

1. Check you’re eligible for a buy-to-let mortgage

You might be looking to purchase a second property to rent as an investment, or perhaps this is your first foray into the world of home ownership.

As with any type of mortgage, you have to meet certain criteria to be eligible for a buy-to-let mortgage, but in a way it’s slightly more complicated than if you were to apply for a standard residential mortgage.

You can apply if:

  • you can afford the mortgage repayments - the lender will ‘stress test’ your application to make sure.
  • you have a healthy credit record and any existing mortgage or debts won’t prevent you from making it work.
  • you earn in excess of £25,000 a year - you may struggle to find a buy-to-let mortgage if you earn less.
  • you’re a certain age when the mortgage finishes (typically between 70 and 75). For instance, if you’re 50 when you take out a 25-year mortgage, it will finish when you’re 75.

2. Find out how buy-to-let mortgages work

If you’re purchasing a home to live in, you’ll need a residential mortgage. But if you want to buy a property as an investment with the intention of making money on it during the mortgage term, you’ll need a buy-to-let mortgage.

Buy-to-let mortgages are similar to residential mortgages in some ways and different in others.

Similarities

  • The more you have for a deposit, the more likely you are to get an attractive deal.
  • The mortgage lender will assess affordability and ‘stress test’ your application before approving it.

Differences

  • You’ll have to pay tax on your rental income and additional fees such as landlord’s insurance, rent insurance and letting agent fees.
  • Interest rates are also usually higher.
  • The minimum deposit for is normally 25% of the property’s value (although this varies from lender to lender).
  • The majority of buy-to-let mortgages are interest-only, meaning you’ll pay the capital in full at the end of the mortgage term.

Buy-to-let mortgages are often seen as a higher risk from the lender’s perspective, which accounts for the higher costs and deposit amount required.

3. Work out how much you can borrow

No matter what type of mortgage you’re searching for, you’ll come across the term LTV (loan-to-value). This is the amount you’re borrowing compared to the overall cost of the property. For instance, if you have a £40,000 deposit for a £200,000 home, your Loan (£160,000) To Value (£200,000) is 80%. It’s probable that the lower the LTV, the lower the mortgage deal’s interest rate you’ll be offered.

With a residential mortgage, the LTV is likely to be around 90% as most lenders look for a minimum of 10% deposit, however when it comes to buy-to-let mortgage deals, the majority of lenders will require a 25% deposit minimum (75% LTV). In part, this is to protect the lender if you fail to pay your mortgage due to things like issues with collecting rent.

The maximum you can borrow is linked to the amount of rental income you expect to receive. Lenders usually require the rental income to be 25–30% higher than your mortgage.

4. Find a buy-to-let mortgage

You can compare buy-to-let mortgage deals for free with Trussle. Let us know your situation and requirements and we’ll find the most suitable deal available for you. We’ll explain details like the maximum LTV the lender’s prepared to offer, helping you decide whether to move forward or consider saving up for a larger deposit which may unlock a more competitive deal.

Like applying for a residential mortgage, you’ll need to get a ‘Decision In Principle’ before obtaining a mortgage offer. The lender will need to cross-check your financial situation (including information on any existing mortgages) and credit history. It definitely helps to have the right documentation to hand in preparation.

5. Consider the tax implications

There are certain tax implications when it comes to buying and selling a buy-to-let property. If you sell your buy-to-let property for a profit, you’ll have to pay Capital Gains Tax (CGT) if the amount you gain is higher than the annual Capital Gains Tax threshold. Currently, Stamp Duty on buy-to-let properties is an extra 3% on top of the standard amount for properties above £40,000.

Furthemore, rental income exceeding your mortgage interest payments and other allowable expenses are liable for income tax.

6. Choose the right buy-to-let property

Before you start looking at individual properties, consider the location in which you want to buy.

Location is really important when buying to let. Certain parts of the country and areas within cities fall in and out of favour with renters, so it helps to keep your finger on the pulse when it comes to market trends.

Think about who your target renter is - Families? Students? Young professionals? The majority of people commute to work so consider how close you want your property to be to major transport routes and links. Consider the type of property too - resale homes are usually less expensive than new builds.

When it comes to picking a buy-to-let mortgage-type, there are various options to choose from.

Tracker mortgage

A tracker rate mortgage is a type of variable rate mortgage that moves according to a particular economic indicator. This is usually the Bank of England’s base rate.

Discounted variable rates

Discounted variable rates are usually offered for an initial period when you first take out your mortgage, and they’re based on the lender’s Standard Variable Rate (SVR).

Fixed-rate mortgage

A fixed rate mortgage gives you a fixed interest rate for an agreed period of time. No matter what happens to market rates during this period, you’ll pay back your loan at the set rate.

7. Consider your responsibility as a landlord

Once the mortgage on your property has been secured and you’re ready to rent it out to tenants, there are rules and regulations you must abide by. This isn’t an exhaustive list, but covers some of the basics.

Contracts

You’re obliged to provide every tenant with a contract which will usually be an AST (Assured Shorthold Tenancy). This provides tenants with the legal right to live in the property for either a fixed period of time or on a rolling basis.

Tenancy Deposit Protection Schemes

By law, you must protect your tenant’s deposit in government supported schemes like DPS (Deposit Protection Service) and TDS (Tenancy Deposit Scheme). Provide your tenants with details of where their deposits are protected.

Utilities

As a landlord, you must ensure appliances are checked every year by a gas safety registered tradesperson and pass a copy of the safety certificate to the tenants. Wiring and electrical appliances must also be checked on a regular basis.

Energy Performance Certificate

The property must have an up-to-date EPC before it can be rented for tenants and you must make a copy available to them. An EPC is valid for ten years.

Fire safety

Furniture and soft furnishings must pass fire safety regulations. Check for fire retardant labels. Fire alarms have to be fitted alongside a carbon monoxide alarm in rooms with gas appliances.

Buy-to-let for first-time buyers

If you’re a first-time buyer looking to get a foot on the property ladder, you may be thinking about obtaining a buy-to-let property to rent out as an investment.

This can be slightly trickier, partly because you’ll need a larger deposit than you would do with a standard residential mortgage. There are a limited number of lenders who offer buy-to-let mortgages for first time buyers, which may mean that you need to put in more money towards the deposit depending on the lender's requirements.

If your first property isn’t one you’ll be living in, you won’t qualify for the first-time-buyer Stamp Duty relief. However, you’ll only have to pay the standard Stamp Duty amount (and not the extra 3% on top).

View our first-time buyer checklist for information on the help available.