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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 you intend to live in. 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. Buy-to-let mortgages often have higher interest rates and fees and require bigger deposits than residential mortgages.

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 don’t intend to occupy. BTL mortgages tend to be taken out on an interest-only basis, meaning that your monthly payments only pay off the interest, not the amount you borrowed to buy the property (the capital). At the end of the mortgage term, you will be expected to repay that capital, even if it means selling the property. Most people remortgage regularly when their initial deal ends to keep their interest rate as low as possible.

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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 to make money from rental income. The property can also be held as an investment that will increase in value as property prices rise. Consumer protection regulations do not apply to them because they are seen as mortgages for businesses. 

Due to tax changes, many landlords have switched to setting up limited companies to manage their BTL properties. Lenders now offer mortgages specifically for these kinds of limited companies.

There is also a second type of BTL mortgage, known as a consumer buy-to-let mortgage. It is 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 home empty

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

Consumer buy-to-let mortgages are regulated in the same way as standard residential mortgages.

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

How much you can borrow largely depends on the rental income you expect to receive. However, your credit score, how much deposit you have, your age and other income sources are also factors lenders consider. 

Your mortgage provider wants to be sure your rental income is enough to cover the costs of being a landlord, not just your mortgage repayments. Buildings insurance, maintenance and statutory checks all need to be covered in addition to the interest payments for your mortgage. Lenders usually insist that the monthly rent equals 125% of the interest payment.

Your mortgage provider will also want to be sure you can still afford to repay the loan if the property is left empty (void) or existing tenants stop paying their rent. You can get insurance to cover these eventualities.

You will usually need a deposit of at least 25% to get a BTL mortgage, although most lenders prefer 40%, giving a loan-to-value (LTV) ratio of 60%. Most BTL mortgages are interest-only loans, which keeps the monthly costs down. The interest rates for buy-to-let mortgages are often a little higher than for standard mortgages. 

Most lenders require borrowers to be at least 21 to apply for a BTL mortgage; if you’re over 70, you may find fewer lenders willing to lend to you.

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 also apply to buy-to-let mortgages. Lenders will also require:

  • A higher deposit

  • Satisfactory rental income

Most lenders expect at least a 25% deposit for buy-to-let mortgages, but you can sometimes get BTL mortgages with just a 20% deposit.

In terms of rental income, lenders expect it to cover the cost of your mortgage interest payments plus expenses, such as repairs, and any periods where the property remains vacant.

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

It depends because different lenders have different costs. Sometimes mortgage providers even charge different amounts depending on which of their mortgages you take out. Make sure you factor in both the interest rate and any fees when comparing the cost of deals, as you may find a mortgage with a higher interest rate but lower fees works out cheaper overall. 

Cost factors to be aware of are shown below.

Deposit size

The bigger the deposit you have to put down on a property, the more choice you have. You’re more likely to secure a lower interest rate too if you have a sizeable amount to put into the property. BTL lenders usually ask for a minimum deposit of 25%, but better deals appear once you have 40%, giving you a loan-to-value (LTV) ratio of 60%. A 75% LTV mortgage can add 10% more to your monthly costs compared to a 60% version.

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, although some lenders offer 10 year fixed rate mortgages. There are also tracker and discounted variable-rate mortgages, and standard variable-rate mortgages that last for the entire mortgage term, although the latter currently tend to cost at least twice as much as fixed and discounted-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 payment. Remember, if you have a mortgage with an initial fixed or discounted interest period, you should consider remortgaging when it ends – if not, you’re likely to be transferred to your lender’s more expensive standard variable 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. You may be able to add this charge to your mortgage debt, increasing your monthly cost, but you should avoid doing this if possible as you’ll pay interest on it for the life of the loan. There will be early repayment charges if you switch your mortgage before the end of the initial deal.


Buy-to-let mortgage interest rates

Buy-to-let mortgages tend to work out more expensive than standard home loans as interest rates can be higher than for normal residential mortgages and they generally have higher set-up fees.

That's because there's more risk to the lender that you won't be able to make your mortgage repayments – for instance, 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 compare headline rates. Check carefully to see what fees apply. The cheapest buy-to-let deals give you a low interest rate and low set-up fees. You may even be able to get them 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 to 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 as they do to individuals.

It’s a good idea to get legal and financial advice before acting, including seeing a tax adviser to understand your options and find out whether setting up an SPV would work for you. 

Buy-to-let remortgages

Once your initial mortgage deal has come to an end, you’ll usually save money by remortgaging to a new deal so that you avoid being transferred onto your lender’s higher standard variable rate. You can either take out a new mortgage with a different lender or switch to a new deal with your existing one.

If you want to add another buy-to-let property to your portfolio, you may be able to increase the size of your loan to raise the cash to buy one, especially if your existing buy-to-let property has gone up in value. Alternatively, you may want to raise extra cash for another project, such as renovating your buy-to-let property.

Many buy-to-let mortgage deals are available for remortgages as well as purchases, while others will be for remortgages only.

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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