Buy-to-let mortgages

Buying a second property can be an investment in itself – and by letting it out, you may be able to make the house pay for some of itself. The money you receive as rent can also ‘top up’ your existing salary, and some landlords rely on it as their sole source of income. Of course, there are some risks involved in buying to let, so make sure you have all the facts first.

What is a buy-to-let mortgage?

If you decide to buy a house with the express purpose of letting it out, you’ll need to get a buy-to-let mortgage. Like residential mortgages (i.e. mortgages you get when you’re planning to live in the property), you’ll put down a deposit and make monthly mortgage repayments. However, a buy-to-let mortgage may have several key differences, including:

  • They’re usually interest-only mortgages
  • You’ll usually need a larger deposit
  • Interest rates tend to be higher on buy-to-let mortgages
  • The amount you can borrow is typically based on how much the property can earn in rent payments, rather than how much you earn

How do buy-to-let mortgages work?

How much deposit is needed for a buy-to-let mortgage?

Typically, you’ll need 25% or more of the property’s purchase price as a deposit for a buy-to-let mortgage. However, you may find some lenders who accept a 20% deposit. Remember that the size of your deposit (among other things) affects how much you’ll pay each month – typically, a larger deposit means smaller monthly payments.

Are buy-to-let mortgages interest-only?

Most buy-to-let mortgages are interest-only, meaning you only pay the interest on the mortgage each month. Then, at the end of the mortgage term, you repay the loan in full. It’s worth noting that to get a buy-to-let mortgage, your lender may need to see evidence of your ability to pay off the full amount at the end of the term – this is usually based on how much you can earn and save in rent.

How much interest will I need to pay?

Getting a buy-to-let mortgage is classed as a business transaction, so the interest rates tend to be higher than with residential mortgages. The interest rate you’re offered may depend on how much you’re borrowing, the value of your property, and how much rent it’s expected to earn. Like residential mortgages, you may get a buy-to-let mortgage with a fixed or variable rate.

Can you rent out your house without a buy-to-let mortgage?

It’s not unusual for people to rent out their home and live elsewhere – for example, if they get a short-term job overseas. If you don’t want to switch to a buy-to-let mortgage, you can apply for ‘consent to let’ from your lender. This gives you permission to let out the property even though you have a residential mortgage.

Your lender may raise your mortgage interest rate if you get consent to let. This is because leasing your home can carry extra risk for the lender – for example, you may struggle to meet your monthly mortgage repayments if your tenants are late with rent.

It’s worth noting that if you want to remortgage while you have consent to let, you may need to change to a buy-to-let mortgage.

How to get a buy-to-let mortgage

Here are some key things to consider before you apply for a buy-to-let mortgage:

Buy-to-let affordability calculation

When assessing your application for a buy-to-let mortgage, lenders will usually want to know how much the property will earn in rent. Many lenders require that the annual rental income is at least 125% of amount you pay in interest on the mortgage per year. So, when looking for buy-to-let property, you may want to get advice from a mortgage broker as part of your application process.

Your credit history

Lenders will want to see how reliable a borrower you are before they approve you for a buy-to-let mortgage. They’ll do this by calculating your credit score, which is usually based on information from your credit report, your application form, and their own records (e.g. if you’ve been a customer before). The better your credit score, the higher your chances of getting the mortgage deal you’re after. Checking your Experian Credit Score can give you a good idea of how lenders may see you.

Comparing mortgages

It’s always a good idea to search and compare mortgages from various lenders, to find the best offer for you. You should also think about what type of interest rate you want, e.g. fixed, variable or tracker. You could also consider getting advice from a mortgage broker – they can help you find mortgages that fit your criteria and even help you through the application process. Note that some mortgage brokers may charge a fee, and some may not cover the whole of the market when searching for deals.

Can a first-time buyer buy to let?

It’s possible to get a buy-to-let mortgage as a first-time buyer, but the lender’s requirements may be far stricter.

This is because lenders are likely to see you as more of a risk, since you don’t have previous experience of managing a mortgage. So, they may ask for a larger deposit or a guarantor to reduce the risk of you not paying them back. A guarantor is typically a relative or friend with a good credit history, who promises to make your mortgage repayments if you can’t. It’s worth noting that being a guarantor carries risks, including the risk of losing your own home.

Remember, you should only get a buy-to-let mortgage if you intend to let the property out – you won’t be able to live in it. Also, getting a buy-to-let mortgage may affect your ability to get a residential mortgage in the future. For example, if your buy-to-let property doesn’t earn enough rent to cover the mortgage repayments, this may affect how lenders decide what you can afford.

What to do once you’ve got a buy-to-let mortgage

Think about cashflow

Consider planning ahead and putting at least three months’ worth of mortgage payments and expenses aside, for ‘void’ times when you don’t have tenants and a rental income, or for when you have to fund repairs and maintenance.

How are you going to manage it?

There’s a lot of responsibility involved in being a landlord, and many people choose an agency to manage the relationship with the tenants. This will of course take a chunk out of your profits (though it is tax-deductible). Managing the property yourself saves that cost, but can be stressful and time-consuming.

Sort out your tax payments

As a landlord, you will have to declare profits gained from rental income on your annual tax form, as well as a ‘wear and tear’ allowance, any management fees, plus various insurance and rates expenses that you – rather than the tenant – are responsible for. For more information, contact HMRC and/or a qualified tax advisor.

Work out your exit strategy

If your buy-to-let mortgage is interest-only, you may not be able to rely on selling the property to pay off the mortgage at the end of its term, as it’s always possible that house prices may fall. If you have investments and repayment vehicles to pay it off, check them regularly, as these can go down as well as up.

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