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What is a buy to let mortgage?

A buy-to-let mortgage – or BTL mortgage – lets you borrow money to purchase a residential property to rent out, rather than one in which you intend to live. Sometimes known as a landlord mortgage, a BTL mortgage allows you to let your property to tenants, students or holidaymakers. It is an unregulated business product rather than a consumer mortgage and usually has a higher interest rate and requires a bigger deposit.

How does a buy to let mortgage work?

A buy-to-let mortgage is similar to a traditional home loan mortgage, except that you borrow money to buy a home that you won’t be living in. BTL mortgages tend to be taken out on an interest-only basis, meaning your monthly payments only pay off the interest. At the end of the mortgage term, you will be expected to cover the remaining capital or sell the property. Most people remortgage regularly to get new deals.

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An expert will be on hand to offer help and advice and you will be supported through each step of your mortgage application.

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Who are buy-to-let mortgages for?

Buy-to-let mortgages are for landlords who plan to rent out a property as a business or investment – to make money from rental income and increasing property prices.

BTL business mortgages are not covered by consumer-protection regulation. Due to tax changes, many business landlords have switched to setting up limited companies to manage their BTL properties. Lenders now offer mortgages specifically for these kinds of limited companies.

You may also have heard of a second type of BTL mortgage, known as consumer buy-to-let mortgage, aimed at people who no longer live in their property and would like to rent it out temporarily. 

There are several reasons why this second type of BTL mortgage might suit you, including: 

  • you have moved in with a partner and are renting out your old home until you can sell it

  • you want to go travelling for several months and don’t want to leave your house empty

  • you might have inherited a house and want to rent it out until you decide what to do with it

Consumer buy-to-let mortgages are regulated in a similar way to a standard residential mortgage. 

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

How much you can borrow will depend on your credit score, how much deposit you have and your business plan. Your age and income from other sources can also influence lenders.

Lenders will want to see at least a 25% deposit and most prefer 40%, giving a loan-to-value (LTV) ratio of 60%. Most BTL mortgages are interest-only to keep the monthly costs down. Interest rates are often a little higher than for standard mortgages. 

The lender will want to be sure your rental income will be enough to cover the costs of being a landlord and not just your mortgage repayments. You will be responsible for buildings insurance and for maintenance and statutory checks. Your rental income must cover these on top of the interest payment for the mortgage.

Lenders will also want to be sure you can still afford to repay the loan if the property remains empty (void) or existing tenants stop paying their rent. You may choose to take out further insurance to cover these events.

Most lenders require borrowers to be at least 21 to apply for a BTL mortgage and make it more difficult or expensive for you to get one once you pass 60.

Criteria for buy to let mortgages

As with standard mortgages, lenders will look at a range of factors when considering your eligibility, such as:

  • Income

  • Loan-to-Value (LTV)

  • Credit rating

  • Debt

  • Outgoings

However, stricter rules will also apply for buy to let mortgages. Lenders will also require:

  • A higher deposit

    - lenders will expect a minimum of 25% for buy-to-let mortgages

  • Projected rental income

    - your rental yield must cover the cost of your mortgage payments, repairs and any periods where the property remains vacant

How much will my buy-to-let mortgage cost?

You’ll need to get your calculator out to work out exactly which deal is best for you as different lenders – and even different mortgage deals from the same lender – come with differing costs. Cost factors to consider are shown below.

Deposit size

The bigger your deposit, the more choice you will have. You’ll also be offered deals with lower interest rates if you have a sizeable sum to put down on a property.  BTL lenders tend to like a minimum of 25% as a deposit but better deals appear once you have 40%. This gives a loan-to-value (LTV) ratio of 60%. The difference between 75% and 60% LTV can add 10% to your monthly costs.

Interest rates

Interest rates for BTL mortgages are often a little higher than for standard residential mortgages. You can choose from 2 and 5 year fixed rate mortgages. Some lenders even offer 10 year fixed rate mortgages for new purchases. There are also tracker-style and standard variable rate mortgages – although the latter currently tend to cost twice as much fixed rate BTL mortgages.

Loan term

Like residential mortgages, standard loan terms are 25 years. Lenders may impose shorter loan terms on older borrowers and this will increase the monthly interest charge. Remember, if you have a fixed interest period, you will probably need to remortgage at the end of it to avoid a much more expensive interest rate.

Fees and charges

Product fees can range from nothing to several thousands of pounds. Some have small initial fees and then a larger fee on completion. Some lenders allow you to add the fee to your mortgage debt, increasing your monthly cost. Fixed deals have early redemption charges too.

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Buy to let mortgage interest rates

Buy to let mortgages tend to work out more expensive than standard home loans. Even the lowest buy to let mortgage rates tend to have higher interest rates than normal residential mortgages.

That's because there's more risk to the lender that you won't be able to make your mortgage repayments. This could happen if you can't find suitable tenants, the property's empty for longer than you planned, or your tenants stop paying rent.

If you're looking for the best buy to let mortgage, don't just go for the headline rate. Check carefully to see whether any fees will apply. You'll probably need to remortgage in a few years, so check whether early repayment charges apply.

The cheapest buy to let deals will give you a low interest rate and low fees for taking the mortgage out - or they might even be fee-free.

Buy-to-let mortgages and tax

You may want to consider setting up a special purpose vehicle (SPV) limited company for your buy-to-let properties. Tax changes brought in from 2017 stopped individual landlords from deducting mortgage interest as a business cost. But limited companies can deduct this interest, meaning less of the rent is taxed.

There are also benefits of receiving income from rented properties via a limited company, particularly for higher rate taxpayers. Instead of paying income tax on rental earnings, limited companies pay corporation tax on profits, at a rate of 19%. The owners then pay a reduced rate of tax on dividends.

Tax advantages are the main reason why more landlords started to set up limited companies for owning properties. Mortgage lenders will now lend to these businesses in the same way they do to individuals.

It is a good idea to see a tax adviser to understand your options and to discover whether setting up an SPV would work for you. 

Nisha Vaidyaquotation mark
Becoming a landlord can be a great investment opportunity, but it isn't without its risks. Do your research to make sure you can get a healthy rental yield and compare deals to find the cheapest rates available.
Nisha Vaidya, Mortgage Editor

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