Buy To Let Mortgages Guide and Comparison
Buy to Let Mortgages are perfect for existing homeowners wishing to diversify into property rental or professional landlords alike.
Buy to Let Mortgages – The Facts in Brief
Before you commit to a buy to let mortgage, here are summary facts:
- Fees are often much higher than other mortgages.
- Interest rates are higher.
- Deposit 20 – 40 % of property value
- Earn £25,000 PA or greater
- Have a good credit record.
- Max age of 70-75 at the end of mortgage term. So for a 20 year mortgage you would be 50 or 55 max age.
- Most buy to let mortgages are interest only.
Read the full guide below, or skip to the best deals.
Compare Buy to Let Mortgage Deals
Buy to Let Mortgages come with a range of deals available. Here we selected the most competitive in each category.
Buy to Let Mortgages – Things to consider
Who can get a buy-to-let (BTL) mortgage?
Anyone can get a buy to let mortgage, but successful applicants usually already own a home, have a good credit rating, low outstanding debt, and earn more than £25,000 per year.
There are commonly age requirements as well; usually applicants must be at least 25 years of age, but under 70 (sometimes 75). This is to ensure that applicants have some life experience and stability, but are also young enough to be responsible for the duration of a 25-year mortgage.
How do buy-to-let mortgages work?
They are like regular mortgages, but since you don’t plan to live in the property you’re buying, they are considered higher risk. For this reason, they are more expensive than regular mortgages and require a higher down payment. Fees are higher, interest rates are higher, and they are more difficult to get.
Minimum deposits can be between 20% and 40% (or even higher). First buy to let mortgage deposits are usually toward the middle end of this, but additional ones tend to be higher.
Unlike residential mortgages (for a property the borrower lives in full-time), most buy to let mortgages are interest only. This means that monthly payments are made only on the interest, and the principle of the loan is paid out in full at the end of the term. This makes the running costs quite low, but requires careful planning (or a very healthy bank account) to handle the large payment at the end.
Regular mortgages are highly regulated by the FCA (Financial Conduct Authority), but buy to let mortgages are not. They can therefore vary quite widely, and there is little pressure – other than market pressures – to make them affordable. The only exception to this can be a ‘consumer buy to let’ mortgage, for cases in which the buyer wants to let the property to a close family member (usually limited to a spouse, child, parent, grand-parent or sibling). In these cases, the mortgage is treated as a residential mortgage. In other words, it is treated the same as if the buyer were planning to live there.
How much you can you borrow for buy-to-let mortgages
This amount varies depending on the amount you are likely to bring in from the rental income. You would typically need the projected rental income to be 25-30% higher than the payment you make to the lender. For example, if your payment on the mortgage (interest only) is £750, you would need to let the property for £1000 or more (125% of the rental income). This would satisfy the lender that the payments are likely to be made.
Where to get a buy-to-let mortgage
As well as most major banks, there are lenders who specialise in giving buy to let and similar loans. These lenders can often be more expensive than the major banks, but they are also more willing to take on risk and to consider more atypical situations – like boat mortgages and other unusual properties.
Plan for times when there’s no rent coming in
You may have a tenant already lined up for the property, or there might already be someone living there, but don’t assume that this will always be the case. Tenants move out, not always at the expected time, and sometimes they are unable to pay the rent and they go into arrears. This can be due to an irresponsible tenant, but it can also happen to a very good tenant as a result of health or employment problems beyond his or her control.
These situations may not be your fault, but the mortgage payment is still your responsibility. Keep a few months’ worth of payments in the account to cover any time spent without rental income. It is also a good idea to keep some money aside for maintenance and other unforeseen (but normal) expenses. Some of these can be quite expensive, such as the failure of a heating or water system, or an aging roof that needs repair.
Don’t rely on selling the property to repay the mortgage
So you pay the interest only, and the principle amount is not due until the end of the term. Sometimes it might be tempting to think that you can sell the property as you near the end of the term, and repay the principle from that – with some healthy profit due to appreciation on the side. The problem is that property prices fluctuate. They do generally increase, but they do so with a rise-and-fall motion that could leave you needing to sell in a depressed market.
If you have a big payment coming, and the market is cold, you may walk away from the deal owing more than you made if you relied solely on resale to make that last payment.
Buy-to-let and tax
Another cost to consider when you sell a buy to let property, is Capital Gains Tax. If your gain exceeds the annual threshold (i.e. 28% for residential property), you will need to pay some of that to HMRC.
Things to consider with a Buy to Let mortgage
Bigger deposit for buy-to-let
Strict fairness and affordability rules govern residential mortgages, but there is a lot less pressure to make buy to let mortgages affordable. Competition between lenders may be able to keep costs down in theory, but with the popularity of investment property portfolios as a way to gain and store wealth, demand for these products can inflate the costs too.
Buy-to-let mortgage rates
Rates vary, as they do for any type of mortgage, based on the amount asked for, and the risk of the situation. The higher the amount, the more risk the lender takes on. Factors like the borrower’s credit rating, the rental income potential of the property, the stability of tenancy, value trends in the area of the property, and other factors may all be taken into account. It is a good idea to do a lot of homework in these areas, and present a clear, well-researched case as to the viability of the venture.
How should I decide if a buy to let mortgage is right for me?
Carefully check out the rates and deposit amount required, your plan to repay the principle at the end of the term, and your backup plans and funds for periods of non-tenancy or non-payment of rent by tenants still residing in the property – and for maintenance and damage.
If you are then comfortable with the risk and investment necessary to carry a buy to let mortgage, and one is offered to you at acceptable rates, then the correct product is there – the choice is up to you.
Do you qualify for a buy to let mortgage?
Though it seems strange to have age as a factor, the first thing a lender may look at is how old you are. Generally, the borrower should be between the ages of 25 and 70. This is to ensure that the borrower is old enough to have acquired some stability of life and income, and is still young enough to be the person carrying the responsibility of the loan throughout the loan period.
The borrower also needs to meet a certain income threshold, usually £25,000 per year or more.
You are usually limited to three buy to let loans at a given time, and there can be a cap set on the total amount you are allowed to owe in this way (it can be substantial though, at £2 million, or even more).
Rental income from buy to let properties
The lender will expect the rental income to cover the interest payments on the loan, plus 25% or more. This assures them that you will be able to carry the payments even through periodic times of non-tenancy, should they occur.
Most lenders will use a calculator which takes into account the rental income, your personal income, and the amount due each month to service the interest payments on the loan.
Compare the best buy-to-let mortgages
There are online tools to assist you in finding the best buy to let mortgage for your situation. You will need to know the value of the property, how much you want to borrow (and therefore how much you are offering as a deposit), and how long you want to borrow it for. You will be able to see what each lender would charge for the buy to let mortgage and begin looking in detail at the ones that most interest you.
Get a realistic cost comparison
You should make sure you get an APRC (Annual Percentage Rate Charge) for each option. This tells you exactly how much the mortgage will cost you if you keep it for the whole term. The introductory rate, main rate, and fees are all included (Arrangement fees alone can be more than £1000).
Most buy to let mortgages are interest only, and you can usually write off a portion of interest payments against your tax bill. This makes running costs much lower, but the principle will be due in a single balloon payment at the end of the term. Increased value (appreciation) may allow you to sell the property at a profit, thereby paying off the principle, gaining back your deposit, the interest you’ve paid, and having some money left over – but it is risky to depend on this. A flat or deflated housing market at the wrong time can not only eat away your profits, it can even wind up costing you money for all your effort and risk.
Be aware of the risks of a buy to let mortgage
You need to be ready to carry an empty property while you find new tenants or have unreliable tenants evicted (this can be a difficult and long process). You need to be ready to pay for regular maintenance, intentional or accidental damage to the property (your tenant may not be responsible for it, or may not be able to afford emergency repairs to things like windows, that need to be replaced immediately to prevent further damage). You also need to have a plan to pay back the principle at the end of an interest-only mortgage term.
If you can handle the risk and responsibilities of carrying a buy to let mortgage, and a lender sees you as a good bet, then building up a property portfolio might be a satisfying and profitable investment for you.
FAQs on Buy to let mortgages
How much could I borrow on a buy to let mortgage?
This amount depends on your personal income, the projected rental income of the property in question, and the costs of the loan. Typically, rental income should be 125% of the cost of interest on the loan.
How much deposit do I need?
From 20% to 40% is usually cited, but in reality you should expect to be nearer the high end of that spectrum. There is high demand for buy to let mortgages, and this keeps costs higher. The more you can put down as a deposit though, the better the interest rate you are likely to get.
Do I need a tenancy agreement?
Yes, you are likely to need an Assured Shorthold Tenancy (AST) agreement.
Are there any property types that are difficult to secure a buy to let mortgage on?
It is easier to secure a mortgage on properties that have a track record of reliable tenants, all year long. Flats in low income areas (or very high-income areas), holiday homes, and flats above commercial spaces are sometimes more difficult to finance.
Can I buy a buy to let property as a first time buyer?
There are no rules against this, but lenders often want buy to let borrowers to own another property, even if it is another rental property.
What is a House in Multiple Occupation (HMO)?
This is a property that will be let to several tenants, who cohabit the property, but pay separately. The most common example is a house with individual rooms and access to the common areas (toilets, kitchen, sitting room) rented out to students. A license may be required for an HMO.
Cant I use a residential mortgage to buy another property to rent?
Usually a residential type mortgage will contain clauses that prevent you renting your house out for financial gain, which can include airbnb types of renting. You should always check with your mortgage lender before doing any of these activities as not doing so could invalidate your mortgage agreement. A breach of mortgage terms would mean the bank could demand immediate repayment of the entire loan amount.