Buy-to-let mortgages

Whether you’re a professional property mogul with 10 houses to your name… or just renting a place to a friend, you’ll need a buy-to-let mortgage if you don’t own that property outright.

They’re a lot like standard mortgages, with a few key differences – you need a bigger deposit and if you don’t already have a tenant, you’ll need to prove your property is rentable before you secure a loan.

In this guide we’ll give you the low-down on buy-to-let mortgages, remortgages, and how to change your residential mortgage if you decide to rent out your home.

Buy-to-let mortgages: an introduction

A buy-to-let mortgage is a mortgage for a property you’re renting to someone else, rather than living in yourself.

If you rent out your property, you’re a landlord. As a landlord, you can start charging rent to cover your mortgage repayments and the costs of maintaining your property. Of course, there may be profits to be made, too.

What kind of landlord are you? The type of buy-to-let mortgage you get depends on how you became a landlord.

If you bought a property with the intention to let it out, your mortgage is classed as a business loan, not regulated by the Financial Conduct Authority (FCA). That’s because you’re seen as a professional who needs less protection.

Portfolio landlord means you own 4 or more properties. If you wanted to buy more, you might find your choice of mortgages more restricted, as to lenders more properties means more risk.

Accidental landlord means you decided to let out your property as a result of circumstance rather than design. For example, you’re moving in with a partner, or you have to relocate for work, or you’ve just inherited a property. Your mortgage application will be protected by the FCA and controlled by the same rules as a standard mortgage.

How to apply for a buy-to-let mortgage

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 the most cost effective loans are “intermediary only” which means you can only get them through a broker. Some brokers charge fees for their services and some don’t, so make sure you check.

If you do use a broker, check how many lenders they have access to as not all of them search the whole of the market. And make sure you know what lenders look for in your application.

How is buy-to-let different from a regular mortgage?

Buy-to-let and standard mortgages are similar in lots of ways. For both, lenders want to see evidence their money will be paid back. But there are a few crucial differences – a standard mortgage is more about what you can afford, whereas a buy-to-let mortgage is about how much rent you can charge for the property.

For almost all buy-to-let mortgages:

1. Your mortgage payments will usually be interest-only, with a bill for the total loan due at the end of your term.

Like standard mortgages, you have a choice of mortgage type – repayment or interest. If you choose a repayment mortgage, it will be repaid in full at the end of the term.

However, most landlords opt to take interest-only mortgages. If you do, that means your monthly payments will be lower, but they won’t make a dent in the loan itself. That means at the end of the loan term, you’ll still owe the same amount you borrowed at the beginning.

Usually, if the property is on an interest only mortgage, buy-to-let landlords end up selling their property at the end of their term. Hopefully, its value will have gone up, so they pay off their loan in one go and pocket the profit (after paying their capital gains tax, of course).

Otherwise, you can choose a repayment mortgage – there’s nothing to stop you doing that.

It’s important you get professional advice when deciding whether buy-to-let is worth it for you, as there are lots of legislation and tax considerations. An accountant can help you make the right decision.

2. What you can borrow is based less on what you earn, and more on the rent you charge tenants.

So before they offer you a loan, lenders will check similar properties in your area to see what the demand is like. If there’s a similar property that’s been on the market for quite a while, or lots of available properties waiting for tenants, that might affect their valuation of the rental income. Lenders want to make sure your rent will cover at least 125–145% of the insurance you pay. Another way of saying this: lenders want to make sure your ICR (interest cover ratio) is 125%–145%.

If you have a higher salary, some lenders will take that into account and lower their ICR requirements – the idea being you’d be able to cover any rental shortfalls from your own income.

Before you approach lenders, you might like to do some market research of your own. Talk to letting agents in the area and look at listings to find out how much similar properties are being rented out for.

That doesn’t mean your salary isn’t important. You’ll probably need to earn more than £25,000 a year, and show you’ll still be able to make payments if interest rates rose… or the property sat empty for a few months.

If you’re a portfolio landlord (ie you let out 4 or more properties), lenders will look at your finances with more scrutiny, and how each one of your properties is performing.

3. You need a bigger deposit than a standard mortgage, usually 25% or higher.

That’s because lenders see buy-to-let loans as a bigger risk.

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

Usually, you’ll need a minimum of 25% deposit on your buy-to-let mortgage. Any less and you end up with a limited choice of lenders and considerably higher fees.

That’s a lot higher than the 5–10% of a standard mortgage as lenders see buy-to-let mortgages as a greater risk than standard home loans. That’s because whether they get their money back doesn’t just depend on you, the borrower. It depends on a far less stable and predictable source: your tenants paying their rent.

Why a bigger deposit is better

15% is bare minimum. A low deposit won’t stop you getting a loan, but it will heavily restrict your choice of lenders and rates. If you’re buying to let for the first time, 15% may get you turned down completely.

If you can afford to, increase your deposit to 25%. That’s the magic threshold, where you’ll start to see your choices and rates improve dramatically.

Applying for your mortgage: what lenders look for

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:

Property price (ideally above £40,000)

Some lenders won’t lend money for homes valued below £40,000 or so. Some even set the threshold at £100,000.

That’s unlikely to be a problem in London, where the average price of a home in 2017 was a whopping £480,000. But in the North East, where the average drops to £130,000, a low property price might restrict your choice of lenders.

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.

But don’t worry, as long as your property is structurally sound, chances are there’s a specialist lender out there willing to take you on. A mortgage broker 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 a buy-to-let mortgage – at least 25 for some lenders. There’s no upper age limit, because unlike a standard mortgage, your loan repayments don’t rely on your salary.

Remortgaging your buy-to-let loan

You might want to save money with a better rate. Or borrow more money to buy another property. Either way, 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 broker before you approach lenders.

You could save money

If your fixed or tracker mortgage has come to an end, you might find yourself on your lender’s standard variable rate (SVR). And you could end up paying hundreds of pounds more than you need to every month.

Expect higher interest rates than residential

Your buy-to-let remortgage will almost always mean higher interest rates compared to residential remortgages. That’s because lenders see buy-to-let mortgages as a higher risk – they’ll be considering the odds your tenants don’t pay their rent, or your property sits empty for a while.

How to find the right deal

If you’re looking for remortgaging 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 true cost. A mortgage broker can help you make sense of the options, and find the one that’s right for you.

Turning your residential mortgage into buy-to-let

If you decide to rent out the property you’re living in to someone else, you’ll have to switch your standard residential mortgage to a buy-to-let mortgage.

You’ll have to get permission from your lender to do this. If you don’t change your mortgage, you risk invalidating your mortgage contract and being asked to repay your whole loan at once.

Then when you start considering things like fixed rates and fees, it can get complicated, so check with your broker on the best thing to do first.

(Don’t forget to upgrade your buildings insurance to landlord’s insurance. And make sure you understand all your responsibilities as a landlord.)

Letting out your home during your residential mortgage

If you have a residential mortgage already, and you want to let out your home for a specified period of time – a year, say – you can ask your current lender for a “consent to let” mortgage. This is different from a buy-to-let mortgage, where you make your intentions to let clear from the beginning.

That’s because consent to let is seen as a temporary thing – you won’t be able to keep asking for several in a row.

During the consent to let period, lenders will usually raise the interest rate (because you renting out your home means more risk for them). Then when the period comes to an end, if you want to continue renting out your home, you can remortgage onto a buy-to-let mortgage.

Let-to-buy: moving to a new home, renting out your old home

If you want to rent out a home you already own, and at the same time buy another home to live in yourself, then let-to-buy is for you.

Let-to-buy is a way to apply for two types of mortgages at the same time:

  1. A buy-to-let remortgage for the property you’re moving out of and intend to let out
  2. A standard residential mortgage for your new home

Finding two good deals at the same time that are each right for you and work together might be a challenge if you go it alone. A mortgage broker can help you make sense of let-to-buy.

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.