What’s a buy-to-let mortgage?
A buy-to-let mortgage is a mortgage for a property you’re renting to someone else – as opposed to a residential mortgage, which is meant for a property you’ll be living in yourself.
If you’ll be letting out the property you’re purchasing, lenders will almost always require your mortgage to be a buy-to-let mortgage.
Because a buy-to-let mortgage is seen as a business investment, they also have higher interest rates and require higher deposits than residential mortgages.
What’s the right buy-to-let mortgage for me?
The type of buy-to-let mortgage you get depends on what kind of landlord you are. Since 2016, there are two categories you can fall into – business, or consumer.
If you’re an “accidental landlord,” you’d probably fall into the consumer buy-to-let category. Accidental landlords are homeowners who decide to let out their property after the fact – for example, because they’ve inherited a property from a relative, they’re moving in with a partner, they have to relocate for work, or they’re going travelling for an extended period of time. Consumer buy-to-let mortgages are protected by the FCA and controlled by the same rules as a residential (standard) mortgage.
If you’re purchasing a property with the intention to let it out, you’re in the business buy-to-let category. Your buy-to-let mortgage will be treated like a business loan, and the lender will take the future rental income for the property into consideration when they’re deciding how much you’re eligible to borrow.
Portfolio landlords are landlords who own 4 or more properties – also in the business buy-to-let category. If you wanted to buy more, you might find your choice of mortgages more limited – to lenders, the more properties you have leveraged, the more risk.
What fees do buy-to-let mortgages have?
Many of the fees that come with buy-to-let mortgages are the same as with residential mortgages – but there are a few extra costs you’ll need to keep in mind:
- Stamp duty (you’ll be charged more on additional properties)
- Building and landlord insurance (and optionally, rent insurance)
- Tax on rental income you earn
- Letting agents’ fees, if you choose to use them
- Maintenance and repairs for the property, or possibly ground rent
It’s worth investigating landlord regulations and landlord responsibilities to find out more about the costs involved in buying a property to let.
Buy-to-let mortgages tend to be more expensive than residential loans. Some lenders don’t even offer mortgages for buy-to-let properties. You can search for buy-to-let deals yourself, or use a broker to search the whole market for you.
The majority of cost-effective buy-to-let mortgages are “intermediary-only,” which means you can only get them through a broker (like Habito!)
Your Habito mortgage expert will be able to check every buy-to-let deal and find the best option for your particular circumstances. Then, they’ll do the paperwork for submitting your application to the lender for you.
What deposit do I need for a buy-to-let mortgage?
A 15% deposit is typically the bare minimum to get a buy-to-let mortgage.
If you’re already a landlord, a low deposit won’t stop you getting a loan, but it will majorly limit your choice of lenders and rates. If you’re buying to let for the first time, lenders often want an even bigger deposit, so 15% could get you turned down completely.
If you can, it might be a good idea to try to increase your deposit to at least 25%. That’s the magic threshold – where you’ll start to see your range of choices and rates improve significantly.
What do lenders look for when you apply for a buy-to-let mortgage?
As well as finding a deposit and proving your property is rentable, lenders will ask you for information about you and the property you’re buying.
Here are some of the main things lenders look at:
Some lenders won’t lend money for homes valued below £40,000 or so. Some even set the threshold at £100,000.
Property type and materials:
Lenders tend to be more likely to approve buy-to-let mortgages for terraced, semi-detached and detached properties and purpose-built flats.
It might be more difficult to get a loan on a thatched barn conversion, for example, or an ex-council flat in a high-rise concrete block, or a block of flats over 4 floors with no lift – lenders tend to prefer properties that are easier to resell. And watch out for flats in buildings made with combustible external wall materials (cladding), which could mean you’ll need an ESW1 form
to be approved for a mortgage.
But for the most part, as long as your property is structurally sound, chances are there’s a specialist lender out there willing to take you on. Your mortgage expert can help you find one!
The number of other properties you own already:
If you have 4 or more mortgaged buy-to-let properties already, you’re classed as a portfolio landlord. Now, when you apply for a new loan, lenders will examine how well all your other properties are doing as part of your application. You might find your choice of mortgages is more restricted as well, as for lenders that means a lot more risk profiling to do.
How old you are:
You need to be at least 18 to apply for most buy-to-let mortgages – and some lenders want you to be at least 25. There’s no upper age limit, because unlike a residential mortgage, your loan repayments don’t rely on your salary.
Remortgaging your buy-to-let
Remortgaging your buy-to-let mortgage is usually pretty straightforward.
Most lenders won’t let you remortgage to do things like pay a tax bill or invest in shares. It might be a good idea to check your reasons for remortgaging with your mortgage expert before you approach lenders.
If you’re looking for buy-to-let remortgage deals yourself, don’t be fooled by amazing rates and shiny deals. There might be other fees, and changing interest rates will affect how much you pay over the life of your mortgage – its total cost. A Habito mortgage expert can help you make sense of the options, and find the one that’s right for you.
I’m a first-time buyer – can I get a buy-to-let mortgage?
The simple answer is yes – but with caveats. It’s a good idea to speak to a broker to see what’s the best thing for you to do.
Many lenders will need you to own your own residential property (normally for at least six months) before they’ll offer you a buy-to-let mortgage.
If you’re a complete first-time buyer, and you want to go straight into buy-to-let, your options will be extremely limited. You’ll also lose your stamp duty exemption, which only applies if you’re buying your first residential property.
If you do get the thumbs-up from a lender, do your homework before taking on your first tenants. Renting can be profitable, but there are costs too. Like maintenance, landlord’s insurance and letting agent fees (think 15–20% of the rent you charge tenants). And there’s no guarantee your property won’t be empty for a few months.
Can I get a buy-to-let mortgage if I have credit issues?
While having good credit is obviously ideal, having a less-than-stellar credit history probably won’t completely prevent you from getting accepted for a buy-to-let mortgage.
That said, you might need more deposit to offset credit issues, and your choice of rates might be pretty limited. Your mortgage expert can look at your specific circumstances and help advise you on what your buy-to-let options are if you have bad credit.