How buy to let works

A buy to let mortgage is designed for those who want to invest in property and rent it out to someone else. Here is everything you need to know about them.
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How do buy to let mortgages work?

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

What is buy-to-let?

It’s when a property is bought to rent out to somebody else.

You can use a specific buy to let (BTL) mortgage to purchase the property. This means you can buy property as an investment without needing to save up the full amount to buy it outright. 

You then let out the property and act as the landlord to your tenants. You charge them rental payments to cover the mortgage and your other costs.

Why do I need to a buy to let mortgage?

Because they are different from standard residential mortgages. If you intend to buy a property and let it out, you need a buy to let mortgage.

A key feature of buy-to-let mortgages is that, rather than looking at your salary, the lender looks at the potential rental income of the home when deciding how much you can borrow.

What is the buy to let lending criteria?

You will generally need to have a deposit of at least 25% of the home’s value although some lenders will lend to you if you only have a deposit of 20%. You’ll also have to satisfy the following buy to let mortgage conditions:

  • Be a homeowner, ideally paying off a mortgage

  • Be able to pay off your buy to let mortgage by the age of 75

  • Have a good credit record - i.e. a good track record of managing credit

  • Prove you can afford to maintain and repair the BTL property

Can you make money from buy to let?

The rent you charge should pay your mortgage and additional costs, but most landlords aim to make a profit too. There are two ways you can do this:

  • Rental income: The rent you charge should be more than the cost of the monthly mortgage repayments. Although there can be other costs like repairs or letting agent fees, you may want to set the rent so that you are able to keep some of the rent for yourself.

  • Capital growth: You can make money if you can sell your property for more than you paid for it.

What types of buy to let mortgages are there?

You can get most types of mortgage for a buy to let property. You will need to decide if you want a fixed, variable, tracker, discount or capped interest rate. Here is how to decide between them.

What type of mortgage is right for you?

Interest only buy to let mortgages

Most buy to let mortgages are interest only, which means your monthly repayments just cover the interest owed. This means the amount you borrowed - the capital - will not be paid off until you sell the property (or find another way of settling the debt).

Repayment buy to let mortgage

A repayment mortgage will pay off the entire amount you borrowed by the end of the term. This means at the end of the mortgage’s lifespan you could either:

  • Keep the property and continue to rent it out, keeping all of the rental income for yourself

  • Sell it and keep the full sale amount

Repayment mortgages cost more per month and are only suitable if you can charge enough rent to cover the extra cost.

How long are buy to let mortgages? 

Buy to let mortgages are usually around 25 years. You will need to pay off the balance at the end of the mortgage term, or you could sell the property to do this and keep any profit you make.

How much does buy to let cost?

You will have to pay all of the normal costs of buying a property, like mortgage and solicitor fees.

Some fees are likely to be higher than on a normal mortgage:

  • The deposit: Many lenders require a deposit of at least 25% and some want even more.

  • Mortgage fees: Several charges that come with the mortgage, like the arrangement fee, may be higher.

  • Stamp duty: You have to pay more stamp duty on a property if it is not your main residence. The amount is higher for buy to let than residential properties.

  • Interest: This is likely to be higher than with a residential mortgage. Find out how much a mortgage will cost you.

What other things do you need for a buy to let mortgage?

Once you have bought the property, you need to bear in mind other expenses over and above paying off the mortgage.

For example you need to pay:

  • To renovate and improve the property to make it legally safe to live in and attractive enough for someone to rent.

  • Letting agents fees for advertising the property and managing your tenants. This is usually charged as a percentage of the rental income.

  • Maintenance costs on the property, including making any repairs. You can check what repairs you have to make on the GOV.UK website.

Do you pay tax on buy to let?

You will pay tax on the profit you make from your buy to let investment, including:

  • Income tax on rental income

  • Capital gains tax on profits you make from selling the property

If you have incorporated as a company, the amount you are taxed is based on the profit you have made minus allowable expenses like:

  • Interest on your mortgage

  • Maintenance and repairs

  • Insurance

  • Letting agent fees

  • Utility costs

If you’ve not set up a company for your investment, then you will not be able to deduct mortgage payments from rental income when it comes to tax.

You can work out your rental income and how much tax you have to pay on the GOV.UK website.

Requirements for a buy to let mortgage

Each lender has different requirements for buy to let mortgages but they will only accept your mortgage application if they think you can afford it.

They will base this on:

  • How much rental income they expect you will get from the property

  • Your financial circumstances

These will also affect how much they will be willing to lend to you.

Your potential buy to let rental income

Lenders will look at how much rental income you will get from your property and compare this to the monthly repayments you would make on the mortgage.

The rental income will usually need to be at least 125% of your mortgage repayment. This means it would need to cover the full mortgage payment plus another 25%.

For example, if your monthly mortgage repayments came to £400, you would need to ren the property for at least £500 per month.

Lenders will ask you to confirm the annual rental yield and check whether you are likely to make this much by comparing the new property with similar rentals in the area.

Your financial circumstances

Lenders will decide if you can afford the mortgage by looking at how much the repayments will be and:

  • Your credit record: Your current borrowing and how well you have kept up with repayments is on your credit record, which helps lenders decide if they want to offer you a mortgage.

  • Your income: Many lenders only accept you if you earn more than their minimum, usually around £25,000 each year.

  • Your outgoings and existing debts: They will check what you spend and what you already owe on the mortgage on your own home, loans and credit cards.

  • Your deposit: A higher deposit should make it easier to get accepted.

What are the risks of buy to let?

You should avoid investing in property if you cannot afford to risk losing money. You could make a loss in the short term or overall if:

  • Your property is empty: If you cannot find tenants, you will make no rental income, meaning you will need to pay the mortgage yourself.

  • You need to repair the property: You may need to spend money on fixing the property if it is damaged by tenants or by issues like subsidence or extreme weather.

  • You have problem tenants: If they refuse to pay rent, damage your property or steal your belongings, you will be out of pocket. Here is how to deal with difficult tenants.

  • Interest rates rise: Your costs could increase if mortgage interest rates rise because this will push up the amount you need to repay each month.

  • House prices fall: If you took out a buy to let mortgage and eventually sell the house for less than the mortgage amount you took out, you could make a loss. You will need to pay off the rest of the balance yourself.

Make sure you get buy to let landlord insurance

You can protect yourself against the risks of being a landlord with insurance policies to cover your buildings, contents, legal liabilities and rental payments.

Here is what landlord insurance can cover and how to choose the right policy.

How to get started with buy to let

Here is everything you need to know about getting a mortgage

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