In the world of mortgages, buy to let is a unique kind of borrowing. While investing in a specialist property – or, better yet, multiple properties – that will produce rental yield is a great way to bolster your income, interest rates and monthly payments connected to buy to let mortgages can vary sharply.
If you’re interested in mortgages of this ilk, you’ll need to ensure you seek the appropriate guidance. Talk to a professional mortgage broker before embarking on life as a landlord, as a rash decision could result in deeply unfavourable payment terms.
Throughout this guide, we will discuss the art of finding the perfect mortgage on a buy to let basis, ensuring that you do not find yourself overpaying on a deposit, interest rates, or any other aspect of your investment.
What is a buy to let mortgage?
On paper, the idea of a mortgage is pretty simple. You identify a property, pay a deposit drawn from your savings, and obtain a loan in the form of a mortgage that allows you to enjoy all the perks of home ownership.
Mortgages released on a buy to let basis are a little different. This means identifying a property (or properties, if you have the cash and capacity to manage more than one) that can be leased out to rental tenants. You will then apply for a mortgage to purchase this property, and look to repay the mortgage through the rent you bring in each month.
How do buy to let mortgages work?
Rather than exclusively deciding whether the loan will be granted based on your income and outgoings, as well as your credit score, funds available from personal savings accounts, and other expenses, a mortgage for a buy-to-let property will also factor rental yield into an agreement.
If you request a mortgage that involves payments of £800 per month, and you can produce a compelling business plan that suggests your property will attract £1,200 in rental yield, you have a much greater chance of being accepted for a loan. On the other hand, if your payments total £800 and a blue sky rental yield is the same, you may struggle to convince a lender that you are a safe bet.
There are some other things to know about buy-to-let mortgages too. These include:
- You will likely need to lay down a higher deposit – usually 25% or more.
- Some of the additional fees imposed by lenders may also be higher.
- Mortgage rates on buy-to-let properties do not always mirror those on their residential counterparts.
- While you may be able to obtain buy-to-let mortgages from a branch of most high street lenders, you’re likelier to get the best deals on this line of credit through a professional like ABC Finance.
How do I choose a mortgage for a buy to let property?
Like all mortgages, you’ll need to shop around for the best deals on a buy-to-let property. Factors that should influence your ultimate decision include:
- The cost of monthly payments, especially when compared to potential rental yield.
- The length of the mortgage term. 15 years and 25 years are very different commitments, for a variety of reasons.
- The interest rates you are offered, alongside other fees. Read the small print, as the devil is often in the details here!
- Whether you will be offered a fixed or variable interest rate.
- Whether you can realistically afford the minimum deposit requested – some lenders ask for more than others.
Keep investigating the ABC Finance website, as you’ll find an array of different guides related to mortgages here – whether on a buy-to-let basis or otherwise.
How much do BTL mortgages cost?
There is no one-size-fits-all costing model attached to mortgages as every application will be reviewed on its own merits, but do expect to pay more for a buy-to-let agreement than you would on a private home. You will need to lay down more upfront as a deposit, and interest rates will be higher.
One way to keep costs down on these mortgages is to take out an interest-only mortgage. This way, you will not be on the hook for paying down the value of the property – just the interest. This will help you turn a substantially higher profit on your rental yield, but you’ll need to settle the outstanding property balance and close your account when this term comes to an end.
Can I choose between variable and fixed rates?
Your lender will usually decide whether you are offered a fixed or variable interest rate. Most of the time you will be offered a fixed rate for a set term, then moved to a variable rate.
A fixed term could be considered safer, especially on an interest-only mortgage, as this means you will know exactly what you are paying each month. This will help you save up enough to pay off the mortgage as and when required.
A variable rate, as the name suggests, could save you money if national interest rates are lower, but it could also lead to an increase in what you need to pay. This is always the risk when investing in property.
How to apply for a buy-to-let mortgage
Your first step, as always, will be identifying the home that you are looking to purchase. Once this is done, use the ABC Mortgage Calculator to determine potential payments and fees to confirm whether you can realistically afford this loan.
If the answer is yes, you can pull together your deposit funds and start discussing loans with potential lenders. As always, you will be asked to provide evidence of your income, as well as any outstanding debts, and will also be grilled on how much rental yield you expect to pull in fro this home.
You can make the application through the branch of a high street lender, or seek the support of a specialist like ABC Finance. The latter are always likelier to find the best deals, potentially saving you a great deal of effort and energy.
Who is eligible for a buy-to-let mortgage?
On paper, anybody can apply for a mortgage of this type. When it comes to mortgages, money talks. You’ll just need to prove that you can keep your mortgage account in good standing.
As a rule, though, most lenders prefer to offer these mortgages to people with experience in managing a buy-to-let home. You are more likely to be accepted for the loan, and attract fewer fees, if you have experience in the rental market.
What to consider before getting a BTL mortgage
If you feel that this kind of mortgage appeals to you, ask yourself a few final questions before launching an application.
- Can you really afford all the fees involved with the mortgage, ideally without relying on credit cards or decimating your personal savings?
- Do you have the funds, and the necessary skills and tools or contacts, to rectify any significant problems and works that may arise with the home? You cannot leave tenants in a home that has flooded or has lost heating, for example.
- Are you certain you will be able to find, and retain, tenants for the property in question? Does it meet UK building regulations, and is it in a suitably desirable area?
- Will taking on a mortgage of this type impact your income or pension, whether for good or ill?
- Do you have the time and patience to manage tenants and their complaints? These mortgages can lead to a lot more work than you are expecting!
Ultimately, the biggest question you need to ask yourself before applying for this mortgage is whether the rewards outweigh the risks. If the answer is yes, start researching lenders and preparing your application for such a loan. Remember, ABC Finance are always here to help – you can get in touch with us online or over the telephone.
FAQs for buy to let mortgages in the UK
If you still have queries about the world of buy-to-let mortgages, let’s review some of the most common questions that arise about this complex loan.
What is the difference between a buy to let and residential mortgages?
A residential mortgage will typically be offered at a lower interest rate and smaller deposit because you will be living within the property. This means that you are likelier to protect the lender’s investment, and will be considered a lower financial risk. After all, most people strive to improve their home, maximising quality of life and increasing the potential resale value.
If you are seeking a mortgage on a buy-to-let basis, you will not be living on the site. This can change the perspective of lenders, who will seek assurance that you will act appropriately as a landlord. As you will have limited direct control over how the property is treated, and your ability to pay the mortgage may depend on receiving your rental yield, buy-to-let mortgages are considered a higher financial risk by a lender. This will be reflected in your mortgage offer.
How much can I borrow?
This depends on your personal finances, how much you can lay down as a deposit, and the proposed rental yield offered by the property or properties that you are interested in. Use the ABC Finance Buy to Let Mortgage Calculator as a guide to how much lenders may be willing to offer you, and an indication of the interest rates you may need to apply.
How much deposit will I need?
The average minimum deposit on buy-to-let mortgages is 25% of the property value, though some lenders will ask for as much as 40%. This is obviously a much higher deposit than you would expect to pay on a residential mortgage, but the additional deposit is due to the increased risk of buy to let loans.
Can a first-time buyer get a buy to let mortgage?
As a rule, lenders that specialise in buy-to-let mortgages prefer to loan money to established landlords. Renting and managing a property is a lot of hard work, and it’s not a lifestyle that will suit everybody. Your lender will ve kee to see proof that you will be able to keep tenants satisfied and maintain the property, as well as meet your payments every month.
This does not mean that it is impossible for a first-timer to gain access to buy-to-let mortgages. Just expect a lot more scrutiny, and potentially higher fees and interest rates to balance out the risk of your inexperience.
Can I choose between capital repayment and interest only mortgage?
This depends on your lender, and what style of payments you may qualify for based on your credit history, income, and potential rental yield. Most people that take out a mortgage on a buy to let basis prefer interest only as this means lower monthly payments, thus maximising rental profit, but remember that the entire loan must be repaid at the end of the term.
Can I offset my mortgage payments against tax?
Be aware that, if you purchase a property in the UK on a buy to let basis, you may be liable to pay more tax. Any income from rent on the property must be declared on a self-assessment income form.
As a landlord, you may be able to claim a 20% tax credit o offset against interest on the mortgage. You can also reduce some maintenance costs, or fees paid to letting agents, as business expenses. Do be aware of the tax implications of this kind of mortgage, though. Your whole tax bracket based on personal income may change.
Can I live in the property if I have a buy-to-let mortgage?
This is legal in the UK, but it may contravene the terms of your mortgage agreement. One of the key terms of your mortgage may be that the site is rented out to external tenants, not used as your primary residence.
As an aside, it’s not really fiscally prudent to reside in a buy to let property anyway. A mortgage for a residential home will be much cheaper, so there is little to gain by adopting this living situation.
Can I switch my residential mortgage to buy to let?
If you wish to change the terms of your mortgage from residential to buy to let, you will need to obtain permission from your mortgage lender. If your lender says no, you can always look for a new loan with a different provider in the form of a remortgage.
Why do I need to put down more money upfront on a BTL property?
As discussed previously, a buy to let mortgage will always be considered a greater risk than a residential mortgage by a lender. If you struggle to keep up with your monthly payments on this property, it will be harder for the lender to repossess their investment due to the rights of incumbent tenants. Be prepared to show that you can keep up with your financial commitments, as well as laying down a substantial lump sum to secure the property.