About buy to let mortgages

A buy to let mortgage is what you’ll take out if you plan to buy a property to rent it out. 

If you rent out your property, you become a landlord and have legal responsibilities to carry out.

Buy to let mortgages often cost more than residential mortgages but you can use them to earn a profit. 

Most buy to let mortgages are interest only.

Buy to let mortgages for landlords who invest in property are not regulated by the Financial Conduct Authority (FCA).

If you’re an 'accidental landlord', your mortgage will be FCA regulated.

You’re an accidental landlord if you’ve:

  • inherited a property

  • moved in with your partner and rent out your other home

  • rented out your property short term

If the FCA covers your mortgage, you'll get more financial protection. For example, you might be able to use the Financial Services Compensation Scheme.

You’ll need a buy to let mortgage if you rent your property out. 

If you already have a residential mortgage you’ll need to switch to a buy to let mortgage if you plan to rent it out. 

You do not have to switch if you only plan to rent out your home for a set amount of time but you’ll need ‘consent to let’ from your lender instead. 

Consent to let

If you plan to rent your home out for a while, contact your lender to get their permission. If agreed, they’ll give you consent to let. 

Without permission, you could be in breach of your mortgage contract. Your lender could see this as fraud.

Costs of buy to let mortgages

Buy to let mortgages often cost more than residential mortgages. 

It’ll cost more because: 

  • you need a deposit of at least 25%

  • the interest rate is higher 

  • lender fees are higher

For most buy to let mortgages you’ll need at least a 25% deposit.

Some high street lenders will let you put down 20% and some specialist lenders 15%.

Deposits are higher because lenders often think the loan is more of a risk than for a residential mortgage.

For example, there may be times when the property is empty, or the tenants do not pay the rent.

Reasons to put down a bigger deposit

If you only put down a 15% deposit: 

  • the rates will not be as good as few lenders offer them

  • you have to be a landlord already

It’s best to put down as big a deposit as you can afford. The higher the deposit you put down the better rate you’ll get.

Speaking to a broker can help you understand which buy to let mortgage is best suited to your situation.

How to get a buy to let deposit

There are different ways to get a buy to let deposit. 

You can remortgage your current home to release some equity.  Equity is the value of your home minus the amount you still owe on it.

Find out more in our remortgage guide or house deposit guide.

You will have to pay stamp duty for your buy to let property.

If you buy a second home you’ll have to pay a 3% higher rate of stamp duty.

If you’re a first time buyer you will not be eligible for the stamp duty discount as you will not be living in the property yourself. 

See how much stamp duty you need to pay with our stamp duty calculator.

Buy to let mortgage fees are often higher than with a standard mortgage. 

When you get a buy to let mortgage you’ll have to pay:

  • lender fees

  • survey fees

  • solicitor fees

As a buy to let landlord you’ll need to pay:

  • stamp duty land tax

  • capital gains tax - if you sell the property for more than you paid for it after fees and costs

  • tax on the income you get from rent

How to make money

You could earn money from a buy to let if:

  • your property goes up in value

  • rental rates go up in the local area

It’s harder for buy to let landlords to make money since changes to buy to let tax rules. 

So make sure you add up all the costs of getting a mortgage to make sure it’s worth renting out your property. 

You’ll also be responsible for repairs and maintenance so make sure you have enough as a buffer so you do not lose out. 

If you want to make more money:

  • in the long term, consider buying in an area where house prices have not gone up recently

  • now, choose somewhere with high rental demand like a university area

You could consider regions in the UK that have seen a fall in house prices.

In the year up to November 2020:

  • UK average house prices increased by 7.6%

  • London’s average house price was over £500,000

  • Yorkshire had the highest price growth with a 9.7% growth

If you buy a property from a landlord, you’ll know what to expect to make in rent each month. You could even buy somewhere that already has tenants.

Limited companies are not affected by the changes in buy to let tax rules. 

Setting up a limited company to get a buy to let mortgage can be hard and expensive. It is unlikely to be worth it if you only plan to rent out 1 property.

Even if you have more than 1, it might not be a good idea financially as interest rates can be higher. 

Speak to a tax adviser to see what’s best for your situation.

Buy to let tax rules

In 2020, buy to let tax rules changed. 

The changes mean that buy to let landlords now:

  • pay a 3% higher rate of stamp duty

  • cannot get as much tax relief on replacing items in the home

  • cannot claim tax relief on the interest paid on a buy to let mortgage to buy the home

You can no longer take your mortgage payments from your rental income before you pay tax. 

Instead, you’ll be able to get 20% tax relief for the whole of your interest payment.

You can only get tax relief on expenses for costs involved in letting the property. For example, paying a plumber to fix a boiler. 

Expenses cannot be capital expenditure like adding something new to the property. This includes improving or upgrading something that increases the value of the property.

These costs should be taken away from capital gains when the property's sold.

If replacing something like for like, for example fitting a kitchen, you can set the cost against your rental income.

Even if an expense is not capital expenditure you can only expense it if it's either:

  • repairs and maintenance

  • replacement of domestic items

Repairs and maintenance apply to items in the property or to the property itself, on a like for like basis.

You cannot claim for repairs that insurance has covered

You can claim for excess amounts or parts of the repair work that you’ve had to pay for yourself.

You cannot expense furnishings and equipment you buy for the property for the first time.

You can replace domestic items that are of a similar standard or value.

This includes movable furniture, furnishings, household appliances and kitchenware.

The changes have affected how much you can earn by renting out your home. 

This has made it harder for some buy to let investors to make a profit. Some portfolio landlords decided to sell part or all of their portfolio. 

1 in 4 landlords were looking to sell at least one property over the next 12 months, according to a study.¹

Some landlords are still confident 

Some property investors are still growing their portfolios.

A 2019 survey of 19,000 landlords found that:

  • 73% thought property is the best, most stable long term investment

  • 83% said they were either unlikely or very unlikely to sell a property over the next year

  • 58% said they planned to stay put for the next five years²

Buy to let mortgage rates have fallen in the last few years. This has helped some landlords make a good return.

How much you can borrow

The amount you can borrow with a buy to let mortgage depends on how much income you expect to get in rent. 

You often need a monthly rental income of 25 to 45% more than your monthly mortgage repayments.

Many lenders ask for at least £25,000 in rental income. Others may not ask for a minimum at all.

If you’re a first time buyer, a lender is likely to consider your gross salary when you apply for a buy to let mortgage.

Lenders will look at both your salary and your rental income when working out how much they’ll lend you. 

If you’re a full time landlord, it’s important to keep evidence of your income. An accountant can help you with this and make sure you’re not paying too much tax. 

Most lenders need your rental income to be within 125% to 145% of your monthly buy to let mortgage repayments.

This is so they can be sure you’ll be able to afford the repayments.

For example, if your mortgage repayments are £500 a month, you'll need to have a monthly rental income of at least £725 if a lender asks for 145%.

Lenders may also ask for some details about the property to make sure you’re likely to be able to cover the mortgage. 

Lenders may look at:

  • property price - some will only lend if the home is worth more than £40,000

  • demand for the type of property - you’re more likely to rent out a terrace or semi detached house than a block of flats 

  • how many properties you own - lenders will check how each property is doing to see your track record

  • your age - you must be at least 18 for most lenders but some will not lend to you until you’re 25

  • your income: some lenders ask for a minimum of £20,000 to £25,000 but others will just judge the value of the investment

You can use a buy to let mortgage calculator to work out how much you might be able to borrow. 

You’d need to enter:

  • your rental income

  • how much the property is worth

To get a clearer idea of how much you can afford you’ll need to work out all the costs of being a buy to let landlord.

Compare our best buy to let mortgage deals

Compare 12,000 deals from 90 lenders. One of our advisers can check if you're eligible for the buy to let mortgage deals you find.

Your home may be repossessed if you do not keep up repayments on your mortgage.

There is no guarantee that it'll be possible to arrange continuous letting of the property. Or that rental income will be enough to meet the cost of the mortgage.

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Types of buy to let mortgage

If you take out a buy to let mortgage there are 3 products you can choose from.

A fixed rate mortgage lets you fix your mortgage rate from between 2 to 15 years.

Your repayments will stay the same during that time.

Often, the longer you fix your rate for, the higher your interest rate will be.

Read more in our fixed rate mortgage guide.

Discounted variable rate mortgages are linked to your lender's standard variable rate (SVR).

You'll get a discounted rate for some time, usually between 2 and 5 years.

These mortgages usually have the lowest interest rates and lowest monthly repayments.

Your monthly repayments can go up or down.

Tracker mortgages follow the interest rate of the Bank of England’s base rate.

They often track a certain percentage above it.

Your monthly repayments can go up or down.

Most buy to let mortgages are interest only. So you pay only interest each month instead of both interest and some of the loan. 

You may have to pay a higher interest rate with an interest only mortgage if you have a buy to let mortgage through a limited company. But your monthly payments should be lower.

You’ll need a plan in place to pay off the loan at the end of your mortgage. 

This could be:

  • selling the property

  • investments

  • an endowment

  • taking out another mortgage

Find out more about interest only mortgages.

There are not many lenders who offer buy to let mortgages to first time buyers. Some will not lend to you at all.

Those that do are likely to consider your gross salary when you apply for a mortgage.

The minimum is often around £25,000 and the lender will have certain rules.

As you do not already own a home, you do not have to pay the 3% stamp duty surcharge for investors and second homebuyers.

As you will not be living in the property you cannot get a first time buyer stamp duty discount.

How to get a buy to let mortgage

To get a buy to let mortgage you’ll often need a deposit of at least 25%. 

A good way to find a buy to let mortgage is through a broker.

Some of the best buy to let mortgages that lenders offer are not available directly to borrowers.

You can only get those rates if you go through a broker.

Trussle is a fee free broker and has access to around 12,000 mortgage deals.

Buy to let mortgage providers

Major lenders like Barclays and NatWest offer buy to let mortgages.

You can also get them from smaller lenders, such as Bluestone, Kensington and Kent Reliance.

Some smaller lenders have less strict rules about how much you can borrow.

You can use a mortgage broker to help you find deals. Trussle searches 12,000 deals across 90 lenders to help you find one that’s right for you. 

It's harder to get a buy to let mortgage at the moment because of coronavirus.

Lenders are concerned about the risk of tenants not paying rent and falling house prices.

Some have left the buy to let market, while others have withdrawn certain buy to let deals.

The mortgage market can change fast and some lenders are already bringing deals back.

Find out which lenders are still offering buy to let mortgages by speaking to a broker.

Advice for buy to let landlords

While some costs are easy to be aware of and plan for, others may come as a surprise. 

It’s a good idea to keep track of all of your costs and expenses and how much you get in rent each month. 

It’s also a good idea to have a buffer to fall back on unexpected costs like repairs. 

Most landlords also need a buffer to pay for:

  • management fees

  • property insurance 

  • repairs

  • maintenance like gas and electricity checks

  • times your property is empty between tenants 

  • gas safety checks and certificates

  • tenant deposit insurance 

  • tenancy renewals

  • tenant checks

Agree on the maximum price you want to spend on a property and stick to it. 

This should include costs of any renovations, decorating, interiors and landscaping.

Avoid focusing on little things that will not add to the amount of rent you can charge on the property. 

Assured shorthold tenancies

Assured shorthold tenancies of 6 to 12 months are the most common type of tenancy. 

It’s down to you as the landlord to choose a tenancy length that’s right for you. 

A shorter tenancy makes it easier for you to evict tenants at short notice if you need to. 

Long term tenancy

Longer, family friendly tenancies of 3 years or more give your tenants more security. 

If you know your tenants, a longer tenancy can mean:

  • fewer and shorter periods of time when your property is left empty

  • a steadier rental income as long as your tenant pays on time

  • less to do once your tenants are in the home

  • tenants are more likely to respect and look after the property and report issues before they get worse and more expensive to fix

  • less stress and tension if you have a good relationship with your tenants

Other tenancy types

Other tenancy types include:

  • excluded tenancy - where you live and share rooms like kitchens with your landlord 

  • assured tenancy - mostly used by housing associations

  • non-assured tenancy - often used if you cannot use an assured shorthold tenancy for example if the rent is less than £250 a year

  • company let - only used if you’re renting to a company rather than an individual

Lenders do not like lending to landlords who are in guaranteed rent schemes.  

In these schemes, landlords let a third party manage the property. They pay the landlord a fixed income and take part of the rental income as a fee. 

While it means you still get an income during times when the property is rented out, it all comes out of your rental income so it will still cost you more.

To work out how much rent you should charge you need to know your rental yield. 

Your rental yield is how much money you get from renting out your property. It’s calculated as a percentage. 

You can work out your rental yield by dividing the rent you plan to charge from the property value and other purchase costs.

So if you plan to charge £10,000 a year in rent and the property costs £240,000, your rental yield is 0.04 which is 4%. 

You should then compare this to other rental yields in the area to see if you’re planning to charge too much or too little. 

The average rental yield in the UK is 3.53%. In London it’s 2.83% but in the North West it’s 4.69%.(3)

Costs and income to think about

To work out how much you should charge you should think about:

  • rental income - work out the minimum you need to turn a profit

  • rental prices in the area the property is in

  • furnishings and appliances - if there’s more in the property, the more you can charge in rent 

  • local benefits like stations, schools, bus stops. If you’re near a school or station, people may be willing to pay more rent as they can save on travel 

  • allowing pets - many landlords will not rent to pet owners so there’s a high demand for rental properties that allow pets

It’s important to find a balance, you want to make a profit but avoid putting tenants off by going higher than other properties in the area. 

If you’re a landlord it’s important to understand your responsibilities. 

To learn about your responsibilities read our landlord guide.

Support for buy to let landlords

Landlord insurance can help cover the costs of expensive and unexpected issues with your property. 

You can know all the costs of being a landlord and still fall short if something goes wrong. 

If you’re worried you will not be able to afford costs, landlord insurance can give you peace of mind. 

It can help cover costs of:

  • emergency repairs

  • accidental damage

  • loss of rent

  • compensation if tenants or visitors get injured in the home

  • legal fees to get back unpaid rent

More about landlord insurance.

If you’re a landlord, it’s likely there will be times when you’re between tenants and not getting any rent. 

If you’re worried about the property being empty it’s a good idea to:

  • check you get empty property cover as part of your landlord insurance

  • check if your local council offer empty property council tax reductions 

  • keep track of your rental income, landlord costs and savings can help you plan for times when the property is empty

If you think you’re going to miss a mortgage payment, speak to your lender to see what support they can offer you.

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Apply with Trussle for help with your buy to let mortgage

We're fee free and could help you get your buy to let mortgage.

Our experts look at your current mortgage and your personal situation to check how much you can afford to borrow and then find a deal that suits you.

We’ll keep you updated every step of the way.

Sources

¹ Residential Landlords Association, Renting Housing Crisis As Landlords Sell Up

² Benham & Reeves Landlords Survey 05.07.19

³ Seven Capital: Best rental yields in the UK

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