A buy-to-let mortgage can help you to buy a property to rent out. Our guide will explain everything you need to know as a landlord.
Can I get a buy-to-let mortgage?
You’ll need a buy-to-let mortgage if you’re buying a property to rent out. To qualify for a BTL mortgage, you must meet the following criteria:
- Be an existing homeowner. Most lenders require applicants to own a property before getting a buy-to-let mortgage.
- Have a 25% deposit. Most BTL mortgages start at 75% loan-to-value (LTV), meaning you’ll need a 25% deposit.
- Earning at least £25,000 per year will unlock most lenders. However, some lenders have no income requirements and will base their assessment on the rental value of your buy-to-let.
- Your rental income must be at least 125% of your mortgage payments. Lenders will require evidence of this, such as rental prices in the area, to ensure the rent can pay your mortgage.
- A good credit rating will make it easier to get a mortgage and unlock better rates. If your credit could be better, you’ll likely need a specialist lender with higher interest rates.
- Your age can also be a factor. Some lenders have minimum and maximum age requirements, ranging from 21-75.
Lenders each have unique criteria, and some are stricter than others. Check each lender’s criteria before applying.
How do buy-to-let mortgages work?
Buy-to-let mortgages are for investment, so they work differently from residential mortgages.
Landlords typically use interest-only for buy-to-let to keep mortgage costs down. You’ll only pay the interest and not the mortgage, allowing you to retain more rent.
As you’re only paying interest on a mortgage each month, you’ll still have your entire mortgage balance left to pay when your term ends. Most investors repay the mortgage balance by selling the property or using a repayment vehicle.
How much can I borrow for a buy-to-let mortgage?
Affordability for a buy-to-let mortgage is assessed differently from other mortgages. You’ll be earning an income from the rent, so lenders base the amount you can borrow on the property’s rental value.
How much deposit do I need for a buy-to-let mortgage?
Buy-to-let mortgages start at 75% LTV, so you’ll need a 25% deposit. For instance, you’d need a £25,000 deposit to buy a £100,000 property.
With buy-to-let (and most other mortgages), a larger deposit can unlock the best rates. A 40% deposit will give you the best rates and a better choice of lenders.
A few lenders may accept a 20% deposit, but you’ll be better off saving a bit more as you’ll have more lenders and better rates.
What interest rates can I get on a buy-to-let mortgage?
Your interest rate will depend on the quality of your application. Stronger applicants typically get the best deals. Factors that can influence your interest rates include:
- Loan-to-value: The best buy-to-let mortgage rates start at 60% LTV. Lenders usually reserve their best deals for applicants using higher deposit amounts, as there’s less risk involved.
- Credit history: A clean credit history will help you fly through credit checks and give you access to most lenders. A bad credit rating could lead to using a specialist lender with higher rates.
- Fixed or variable rate: A fixed rate can give you security, but they’re typically higher than variable rates. Although variable rates are slightly lower, there’s always a risk your rate could go up if there are changes in the Bank of England base rate.
What to consider before getting a buy-to-let mortgage
A buy-to-let mortgage is for property investment, so there are risks involved, which you’ll need to consider, such as:
- Stamp duty – As an existing homeowner, you’ll pay stamp duty tax when buying a second property. Stamp duty can range from 3%-15% depending on the value of your BTL property, so you’ll need to factor this into your budget.
- Tax changes – Earning an additional income from rent could change your tax bracket. Either way, you’ll pay income tax on rental income, which can involve submitting a self-assessment tax return each year. You’ll also have to think about capital gains tax (CGT) if you sell your BTL in the future.
- Void periods – Although your rent will pay your mortgage, you’ll still need to prepare for times when you don’t have tenants. Always have capital aside to pay the mortgage when there’s no rent.
- Letting agents – Using a letting agent to manage your property is something to consider. There’s a lot of legislation, such as protecting a tenant’s deposit and issuing the correct paperwork when a tenant moves in.
How can I get the best buy-to-let mortgage deal?
Preparation before a mortgage is crucial, so here are a few tips to help you get the best buy-to-let deal:
- Check your credit score before applying for a mortgage. You can get a copy of your credit report online, which can show you if there’s anything questionable. You can improve your credit score before applying if needed.
- Compare deals across hundreds of lenders to find the best buy-to-let deal possible. You can use an advisor to do this for you.
- Calculate fees as each deal is different. The best rates typically have expensive fees, so you’ll want to calculate the best deal overall.
- Strengthen your application before applying. Minimise your debt and ensure the rental income comfortably exceeds 125% of your mortgage.
What does our expert say?
Take your time when selecting the right buy-to-let mortgage deal. Some mortgages are much cheaper than others and can save you hundreds each year. Also, consider the additional responsibilities of being a landlord, such as property maintenance, tax changes, and whether you can pay the mortgage during void periods.