The buy-to-let mortgage

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.

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.

A bigger 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

Buy-to-let mortgage rates

The rates on a buy-to-let mortgage 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

Buy-to-let mortgages can be deemed as riskier for a number of reasons, including:

  • The possibility of falling house prices
  • Decreasing rental yields
  • The possibility of troublesome tenants
  • Potential property maintenance issues

Loan-to-value ratio

The loan-to-value (LTV) ratio is the amount of money that you’re borrowing against the purchase price of the property.

Lenders of buy-to-let mortgages normally offer LTV ratios at a maximum of 80%, although this has reduced to 75% with many lenders in recent years.

What this means is that on a property worth £200,000, the lender could give you a loan of up to £150,000 depending on rental income.

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.

Interest only deals

While interest only deals have declined in volume on the residential side of the market, they remain a sought-after option for buy-to-let mortgages.

This is a popular option for landlords as the monthly repayments are much lower than with a full repayment mortgage.

This gives the landlord improved cash flow, potentially assisting them in purchasing additional properties should they have the desire and financial resources to do so.

The downside, however, is that your monthly repayments won't actually pay off any of the loan. This is especially risky if the housing market falls flat or even collapses, as this will increase the chance of you falling into negative equity.

Find out if you qualify for a BTL mortgage

Who exactly can apply for a buy-to-let 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

Are BTL mortgages difficult to get?

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.

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 advisor 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.