Buy to Let Mortgages
If you are planning to buy a property, or multiple properties, to rent out, you will need a buy to let mortgage rather than a standard residential mortgage. Buy to let (BTL) mortgages are designed specifically for landlords who want to purchase investment properties to rent to tenants.
How does a buy to let mortgage work?
A buy to let mortgage works much like a regular mortgage in that you borrow money from a lender to buy a property and repay it monthly with interest. However, there are some key differences:
The required deposit is usually higher, often 25% or more of the property’s value.
Fees and charges tend to be more expensive.
Interest rates are typically higher than those for residential mortgages.
These higher costs exist because buy to let mortgages are considered higher risk. Repayments depend on tenants paying rent, and there is always a possibility of rent arrears or periods when the property is empty.
Interest-only mortgages
Most buy to let mortgages are interest-only. This means you pay only the interest each month and repay the full loan amount at the end of the term. Many landlords set aside rental income to help clear the balance when the mortgage ends. Others choose to sell the property at a later date, using the profit from its increased value to repay the mortgage in full.
Who can get a buy to let mortgage?
Lenders will have specific criteria you must meet before being approved for a buy to let mortgage. You should consider the following:
Affordability: Deposits for buy to let mortgages are higher than standard ones, so you may need to save in advance. You should also be able to cover the mortgage if a tenant stops paying rent or if the property is vacant.
Credit history: Lenders will review your credit record to assess reliability. A poor credit history can make approval more difficult.
Income: Most lenders require a minimum annual income of around £25,000 to ensure you can meet repayments if rent does not fully cover the mortgage.
Rental yield: Lenders usually expect the property’s rental income to be between 125% and 145% of the monthly mortgage payments.
Other buy to let considerations
Owning a rental property comes with additional costs beyond the mortgage itself. These may include maintenance and repairs, letting agent fees for managing the property, and tax obligations such as capital gains tax if your profits exceed the annual allowance or if you sell the property for more than you paid.
Interest rates and arrangement fees for buy to let mortgages are usually higher than for standard residential mortgages because lenders see them as higher-risk investments.
Buy-to-let FAQ’s
Can I get a buy to let mortgage if I already own my home?
Yes, you can. Most lenders allow homeowners to take out a buy to let mortgage on an additional property, provided you meet their income and deposit requirements.
How much deposit do I need for a buy to let mortgage?
Typically, you will need at least 25% of the property’s value as a deposit, although some lenders may ask for 30% or more depending on your circumstances and the property type.
Can I get a buy to let mortgage with bad credit?
It is possible, but your options will be more limited. Some specialist lenders offer bad credit buy to let mortgages, though you can expect higher interest rates and a larger deposit requirement.
Do I need to live in the property with a buy to let mortgage?
No, buy to let mortgages are specifically for properties you plan to rent out to tenants. You cannot live in a property that has a buy to let mortgage.
Are buy to let mortgages interest only or repayment?
Most buy to let mortgages are interest only, meaning you only pay the interest each month and repay the full amount borrowed at the end of the term. However, repayment options are available if you prefer to reduce the balance over time.
What income do I need to qualify for a buy to let mortgage?
Most lenders require you to earn at least £25,000 per year. This helps prove you could afford the mortgage payments during any periods without rental income.
How do lenders assess a buy to let mortgage application?
Lenders will look at your personal income, credit history, deposit size, and the potential rental yield of the property. Rental income usually needs to cover 125% to 145% of the monthly mortgage payments.
Do I pay tax on rental income?
Yes. You must declare rental income on your Self Assessment tax return. You can usually deduct allowable expenses such as maintenance costs, agent fees, and mortgage interest.
What happens if my tenant stops paying rent?
You are still responsible for paying your mortgage. It is important to have savings or insurance in place to cover any missed rent or vacant periods.
Can I switch my residential mortgage to a buy to let mortgage?
Yes, in many cases you can, but you must get permission from your current lender or switch to a buy to let product. Living in a property with a buy to let mortgage without approval is a breach of your mortgage terms.