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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.

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

It is an unregulated business product rather than a consumer mortgage.

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.

These are usually interest-only mortgages, 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.

How an interest only buy to let mortgage works

Median LTV based on Mojo Mortgages data from 1 July 2021 to 30 June 2022

How to compare buy to let mortgage deals

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Mojo will find out about your circumstances, check your eligibility, and search across the whole of market to help you secure the best mortgage for your circumstances.

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

Criteria for buy-to-let mortgages

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

As with standard mortgages, lenders will look at a range of factors when considering your eligibility and how much you can borrow, 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

What deposit do I need for a buy-to-let mortgage?

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.

Although if you can put down a bigger deposit, such as 40%, you’ll generally get access to better buy-to-let mortgage deals and rates.

What rental yield do you need for a buy-to-let mortgage?

Lenders usually insist that the monthly rent equals 125% of the interest payment.

This is because 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.

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.

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.

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

In addition to interest rates, there are other costs to consider when taking out a buy-to-let mortgage, including:

Deposit size
Fees and charges
Stamp Duty

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.

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.

Stamp Duty

While this isn’t a specific cost relating to your mortgage, it’s important to be aware that you will be required to pay additional Stamp Duty if you’re purchasing a buy-to-let property as opposed to a residential home.

This surcharge is 3% in England, 4% in Scotland (known as the Additional Dwelling Supplement) and 4% in Wales.

Use our Stamp Duty calculator to find out how much it will cost you.

The average loan value and LTV for a buy-to-let mortgage from July 2021 to June 2022.

Median loan value and LTV based on Mojo Mortgages data from 1 July 2021 to 30 June 2022

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.

Are there different types of buy-to-let mortgages?

Most buy-to-let mortgages are seen as mortgages for businesses, but in some specific cases you can also get a consumer buy-to-let mortgage. Find out about both types below.

If you're unsure which is right for you, it might be worth speaking to a mortgage broker who can do a mortgage comparison and find the best deals for you and your circumstances.

Buy-to-let mortgages for businesses

Most 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 buy-to-let mortgages for limited companies to cater for this. .

Consumer buy-to-let mortgages

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.

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.”

Claire Flynn, Senior Mortgages Editor

Buy to let mortgages FAQs

There are a number of differences between a buy-to-let mortgage and a residential mortgage, which you take out for a home you're going to live in:

While residential mortgage lenders look at how much you earn and how much you can afford to pay back when deciding how much to lend to you, a buy-to-let mortgage provider mainly looks at how much you can rent the property out for when making that decision.
A buy-to-let mortgage deposit generally needs to be larger than a residential one.
The tax treatment is different because lenders and the government regard being a landlord as a business activity.
Most residential mortgages are repayment mortgages but buy-to-let mortgages tend to be interest-only.

This depends on the terms of your buy-to-let mortgage, but it is unlikely that your lender will allow it. Often, as a condition of your buy-to-let mortgage, the property must be let to tenants and not lived in by you. This is because a buy-to-let mortgage is designed to be paid for with rent income from tenants.

If you break the terms of your buy-to-let mortgage, your lender could ask you to repay the loan immediately.