What is a buy-to-let mortgage?

Investing in property has traditionally proved popular in the UK for people looking to make money over the long-term.

Buy-to-let offers property owners the chance to earn income from rent, which often increases above the rate of inflation, as well as the potential to see the value of the home itself grow over time.

If you buy a property and its value rises over time, you could make a profit when you sell. On the other hand, if the price of your property remains stable, the income you make from the rent may well be sufficient to enable you to pay off a significant percentage of your mortgage, helping you to gain equity.

If you have multiple buy-to-let properties (a property portfolio), the lender may assess the entire portfolio to make sure it’s supported by the rental income of each property.

How do buy-to-let mortgages work?

If you're looking to buy a property with the intention of renting it out, then you'll need to apply for a buy-to-let (BTL) mortgage.

These types of mortgages are very similar to the products you’d select if you were buying a property to live in yourself. But there are a few differences:

  • The product fee associated with the mortgage deal are generally higher

  • Interest rates are normally higher

  • The minimum deposit is normally around 25% of the property's value (the lender will determine if you need a larger deposit once they complete a stress-test on the monthly rental income)

  • Most buy-to-let mortgages are interest only as it allows borrowers to keep the mortgage payment low and earn more from the monthly rental income

  • A significant percentage of buy-to-let mortgage lending isn't regulated by the Financial Conduct Authority (FCA)

Many major UK mortgage lenders and some specialists offer BTL mortgages.

Things to consider with buy-to-let

A larger deposit

Due to the fact that a buy-to-let mortgage can be deemed riskier than a regular mortgage, you'll generally need to put down a larger deposit. You may also be charged a higher interest rate than a typical residential mortgage, and your application will be assessed upon different criteria.

In the majority of cases, the minimum deposit you'll need for a buy-to-let mortgage is around 25% of the property's price.

The amount of money that you can borrow when applying for a buy-to-let mortgage depends on the amount you can expect you receive through rental income. Many lenders will require a minimum income of £25,000, however some lenders have no minimum income requirements.

In order to secure a buy-to-let mortgage, you'll typically need to receive a monthly rental income of 25-45% more than your monthly mortgage repayments.

For example, you may be required to pay the following deposit amounts:

  1. BTL - average deposit Property price = £285,000 Deposit of 25% = £71,250

  2. BTL - higher deposit Property price = £285,000 Deposit of 40% = £114,000

Rental income

In order to ensure that you can make the repayments on your buy-to-let mortgage, most lenders will require that your rental income is within the range of 125% to 145% of your monthly mortgage repayments.

Since 2016, many lenders have actually increased this to as much as 145%. So for example, if you have mortgage repayments that total £500 a month, you'll need to be receiving monthly rental income of at least £725 in order to cover the 145% requirement.

Minimum income

If you're a first-time landlord, then it’s likely that your gross salary will be taken into account when you apply for a buy-to-let mortgage. The minimum requirement is normally around £25,000 in addition to other criteria which will be set depending on the lender.

The self-employed and business owners can apply for loans, but it is normal for lenders to require a minimum of one or two years' trading and accounts before approving mortgages in these cases. Consider speaking with a mortgage broker if you’re not sure whether you’ll meet these requirements.

Lender criteria

While the criteria for a buy-to-let mortgage might in some senses be stricter than for a residential mortgage, this doesn't mean that they’re harder to get.

Provided that you satisfy the lender's mortgage criteria and you have the deposit and paperwork in order, a buy-to-let mortgage can usually be arranged within three to six weeks. This is approximately the same amount of time it takes to process a residential mortgage.

A lender will ask you to meet a range of criteria including:

  • A minimum age, normally 18

  • A maximum age, normally between 70 and 75 (some lenders will stretch higher than this)

  • A minimum income of around £25,000 (some lenders don’t have this requirement)

  • A successful credit check

  • Property type

Affordability

The mortgage lender will assess whether you can afford the monthly repayments on your buy-to-let mortgage. However, there are some factors that you should also take into account before you go ahead with the application process.

The day-to-day costs of having a rental property can add up, so it's important to know what they are and to make sure you have money set aside to pay for them. These include:

  • Letting agency fees

  • Property maintenance costs

  • Safety checks, such as gas and electrical

  • Landlord's insurance

  • Rental insurance

Changing your buy-to-let to a residential mortgage

If your situation changes and you need or choose to live in your buy-to-let property, then you’ll first need to inform your lender to confirm their rules around this.

It’s worth seeking advice from a mortgage broker at this stage since you may find that securing a residential mortgage from another lender may work out more financially viable for you.

If it’s not at this time, you’ll need to remortgage to a residential mortgage when you reach the end of your current deal.

Deciding to rent your existing residential property

Not everyone buys a property with the idea of renting it out to tenants. Many people end up doing so for a variety of reasons. You might decide to move into your partner's home leaving yours empty and ready to rent out, for example. You may want to keep your current home, using its rental income to finance purchasing another property. using the rent from your current home. Or you might need to move abroad, or you may even find it difficult to sell your home making you a landlord through no choice of your own.

If this is the case, and you decide to switch your residential home into a buy-to-let investment, you’ll need to take the correct measures:

  1. Let your lender know If you don't let your mortgage lender know that you've decided to rent out your property, then you could be breaching your loan agreement. You’ll need to apply for their consent which may lead to them increasing your interest rate and expect you to remortgage to a residential mortgage at the end of your current deal.

  2. Inform your insurer You'll need to secure landlord's insurance because standard domestic contents insurance won't cover your property if you're renting it out.

  3. Speak to a letting agent Letting agents are there to help you with the tasks involved in renting out your property. They can help you deal with all the legal and administrative aspects (which are significant) in addition to managing any maintenance that might need to be carried out.

  4. Talk to a tax adviser or accountant You'll need to be aware of the new tax implications that affect buy-to-let homes, such as increased stamp duty. In 2016 the stamp duty on buy-to-let properties was increased and is now 3% higher than on residential mortgages.

How much can I borrow with a buy-to-let mortgage?

You could borrow up to 85% of the purchase amount, subject to passing the stress test to prove that you can afford the monthly repayments (as well as the interest) and to assess the risk involved.

The test applies to the total amount you’re borrowing against the purchase price of the property - known as the loan-to-value (LTV) ratio. Like any other mortgage, the borrower must put up a deposit for the property. Lenders tend to offer a maximum LTV ratio of up to 85%, meaning a deposit of 15% would be required.

Some lenders are more generous than others, and the amount you can borrow on a buy-to-let mortgage is mainly based on the monthly rental you’re getting or are likely to get.

However, there are a number of banks and specialist buy-to-let lenders who offer an approach known as ‘top-slicing’, where they’ll allow landlords applying for a buy-to-let mortgage to use both the property’s rental income and their own earned income from employment or self-employment, to enable them to borrow more.

Use our mortgage calculator to find out how much you could borrow.

How to get 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 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

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

  • 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 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).

  • 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.

Applying for a 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 loan-to-value 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 Mortgage 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.

Furthermore, 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.

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 trades person 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).

Frequently asked questions (FAQs)

What interest rates are available on buy-to-let mortgages?

It's common for the interest rates on buy-to-let mortgages to be higher than residential mortgage rates. They can be influenced by a range of criteria, including:

  • the size of the deposit that’s put down

  • how healthy your credit score is at the time

  • the product - how many years fixed rate or variable rate etc

In most cases, the interest rate will vary between two and three percent (as of October 2018). The banks set the standard rates, which may be influenced by the Bank of England’s bank rate.

A variable rate mortgage, such as a tracker mortgage, mirrors the Bank of England’s bank rate, plus a set margin above or below it. This means that your monthly payments can go up or down if the Bank of England’s rate rises or falls. Landlords considering this type of buy-to-let mortgage deal should therefore be prepared for a rise in mortgage payments.

If the Bank of England keeps their rate low during the term of your deal, you may benefit from lower payments than with a fixed rate mortgage (where your monthly payments will remain the same for the term of the deal). But, if the Bank of England’s bank rate rises during the term of your tracker mortgage, your payments may be higher than they would have been with a fixed deal.

A wide range of lenders offer buy-to-let mortgage products, so it can pay to shop around. A mortgage adviser will have access to a range of lenders and can help find the most suitable deal for you.

What tax relief or allowable expenses are available on a buy-to-let mortgage?

The new buy-to-let tax system introduced in April 2017 means that landlords of residential properties will be restricted to the basic rate of Income Tax. The changes will be fully in place from 6th April 2020.

At this point, you won’t be able to deduct any of your mortgage interest payment from your rental income before paying tax – instead, the entire sum of your interest payment will qualify for a 20% tax relief.

Based on the Income Basic Tax rate of £11,001 to £43,000, the higher rate of £43,001 to £150,000, and a personal allowance up to £11,000, it’s estimated that after the restriction, 82% of landlords won’t have any additional tax to pay because their total income, without a deduction for finance costs, doesn’t exceed the higher rate threshold. However, if you’re a landlord with a higher total income than the higher rate threshold, you’ll pay more tax.

Allowable expenses to secure tax relief:

  • must have been incurred by you wholly and exclusively for the purpose of the letting business, such as paying a plumber to repair a faulty boiler.

  • must not be capital expenditure (where spending creates an asset of enduring benefit or when you add something to the property that wasn’t there before). This includes improving or upgrading something that was existing and that increases the property’s value. Instead, these costs should be deducted from capital gains when the property is sold. However, if the kitchen being fitted is like-for-like, of the same standard, size and layout, the cost can be set against your rental income.

Even when an expense is not capital expenditure, to qualify as an allowable expense, it will need to fit into one of two categories:

  • Repairs and maintenance - applied either to items within the property or to the property itself, on a like-for-like basis. You can’t claim for repairs that have been covered by insurance, but you can claim for excess amounts or the parts of the repair work that you’ve had to pay for yourself.

  • Replacement of domestic items - the initial purchases of furnishings and equipment for the property are not allowed, but their replacement (of a similar standard or value) is. This includes movable furniture, furnishings, household appliances, and kitchenware.

Mortgage advisers aren’t qualified to offer tax advice, so it’s recommended that you seek independent tax and legal advice.

How many buy-to-let mortgages can I have?

This varies from lender to lender and largely depends on their appetite for risk. For example, some lenders won’t lend to you if you’re a portfolio landlord. Some may also view landlords with multiple properties in the same location as risky, because a downturn in that specific area would affect the rental attractiveness of the properties and ultimately increase the likelihood of their loan not being repaid.

Many of the mainstream buy-to-let lenders will stipulate a maximum number of buy-to-lets and set a limit of around three to five mortgaged properties (or maximum borrowing amount with them). Some lenders may even set limits on the number of buy-to-let mortgages you can have with other lenders.

Any lender will be looking to ensure you can afford the new mortgage on top of your existing mortgage/s. They’ll calculate if any buy-to-let properties in the background are self-sufficient or not (this usually means rental covering the mortgage by anywhere from 100% to 150%, depending on the lender), and whether any second residential mortgages and their running costs are adequately covered by employment income.

Talk to an experienced buy-to-let broker such as Trussle, who can advise you on how best to proceed and whether your existing lender may or may not be the most suitable option for you.

Further resources

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