If you have aims to make UK property investments work for you, there is every chance you will need a buy-to-let mortgage to obtain the property you then wish to let out. If you happen to have a lot of liquid cash to hand, a buy-to-let mortgage may not be needed, as you’ll likely be a cash house buyer. For most of us though, a buy-to-let mortgage is the only avenue to take if becoming a landlord in the UK is on the agenda.
In this blog, we explain all there is to know about buy-to-let mortgages so you can make an informed decision about the best route for you to take.
What Is a Buy-To-Let Mortgage?
Before you race off and snap up the first good mortgage offer you see, you’ll need to know exactly what you are applying for. A buy-to-let mortgage is a form of property loan that helps you fund the purchase of a property you are going to rent out. They aren’t for everyone and come with a host of caveats that may mean you are not eligible.
What Are the Eligibility Criteria to Get a Buy-To-Let Mortgage?
Buy-to-let mortgages are seen as more of a risk than a standard mortgage. With no guarantee that the property you are letting out will be constantly occupied, lenders may be a little fearful they will not receive the payments stated in the mortgage agreement.
Criteria vary per lender but overall, it will likely include:
- That you have a good credit rating and not have filled a sizable percentage of one or multiple credit cards.
- You may need to already own a home, either outright or with a mortgage in place that has not been defaulted on.
- Proof of earnings and employment. The earnings may be set at a specific rate that illustrates the minimum you must earn before being able to get a buy-to-let mortgage.
- That your rental income from the property will cover 125-145% of the mortgage payments.
- An age limit. In some cases, you may not apply for a buy-to-let mortgage if you are above a certain age. This age can vary per lender, so don’t be put off if one has said you are not eligible. Another may say you are more than suitable.
What Is the Difference Between a Buy-To-Let Mortgage and A Residential Mortgage?
In its most simple explanation, a buy-to-let mortgage is for the property you are renting out, a residential mortgage is for the property you live in. But it’s what makes up the buy-to-let mortgage that shows the real differences.
A buy-to-let mortgage will require a higher deposit than any other mortgage for a house. Where you may be able to pay a 5 or 10% deposit in many cases, a buy-to-let mortgage will have the lowest deposit value at around 20%.
And even then, the availability of the product is limited. Once you have 25%, a whole load more options become available to you, and once you reach 30 or 40%, you shouldn’t have many problems securing one at all.
The associated fees can often be higher than those you find with a residential mortgage too, so this is always worth taking into consideration when looking at the cash you need to put aside. You can see fees just for setting up the mortgage are as high as 3.5% of the property’s value.
It isn’t only fees that are higher on buy-to-let mortgages, the interest rates will also be larger than what you are used to on a typical mortgage. In August 2023, the average interest rate for a buy-to-let mortgage hit 6.79%, in the case of Virgin Money their typical BTL product reached over 9%. Thankfully they have stabilized now and will be found from 5-7% in many cases.
Rates can be either fixed or variable and each stands to deliver benefits, but each can see you spending more than you need to. Research is vital and a mortgage broker may be a practical option to help you navigate your way to the best decision.
Monthly payments on the other hand tend to be lower than on a residential mortgage. This is because in most cases, buy-to-let mortgages are interest-only. This means your monthly payments are eating into the interest and not the loan itself.
Then, at the end of the term you repay the capital loan. This may be done by selling the property or using cash you may have obtained through other property investments you have. You can apply for BTL mortgages that are on a repayment basis too, so it is worth researching the best possibility for your budget.
How Do You Get a Buy-To-Let Mortgage?
Many banks will offer a buy-to-let mortgage, but it is definitely worth shopping around first before taking up an offer. Speaking to a buy to let mortgage broker is perhaps the best way to start.
They have instant access to a wealth of information relating to specific mortgage deals and without any bias towards one product or the other, can give you impartial advice you may not find directly at the bank. Don’t just allow interest rates to be a deciding factor though.
Look at the fees and all other terms associated with it so you aren’t tied into something that could be costing you much more than you had first thought.
Key Considerations
Before signing on the dotted line, you should weigh up:
- Whether to have a fixed or variable interest rate
- Whether to have an interest-only or repayment buy-to-let mortgage
- What fees may come with using a letting agent and mortgage broker
- How much landlord’s insurance will cost
- The tax implications of letting a property out. Both income tax and capital gains should be looked into
- Stamp duty costs
- Maintenance costs for the buy-to-let property
- How to cover the payments when the property is unoccupied
How Much Would I Be Able to Borrow on A Buy-To-Let Mortgage?
The lender will want to look at how much you expect to make on rental income to ensure that the amount you are borrowing is sufficiently covered by the money you are making on letting the property out. In most cases, they want to be able to see that your rental income will be up to 30% more than the mortgage payment.
Your buy-to-let mortgage, just like any other mortgage, will have a loan-to-value ratio, or LTV. This is the amount calculated by the size of your mortgage against the property value. If the property you are buying is worth £300,000 and you have a mortgage of £270,000, you have an LTV of 90% as the remaining ten per cent is covered by your deposit of £30,000.
