Everything you need to know about Buy to Let Mortgages

If you’re hoping to take out a buy to let mortgage, want to know whether you’d be eligible for one, or are simply looking for more information about how they work and how to get one, then you’re in the right place.

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Buy to let mortgages can seem quite daunting, but it’s actually a bit easier than you think.

If you get the right advice.

What is a buy-to-let (BTL) mortgage?

To put it simply, the definition of a buy-to-let mortgage is a type of property investment in which the buyer becomes a landlord with the aim of renting the property out at a profit.

A BTL property is basically a house, flat or other type of building which has been purchased through a BTL mortgage with the intention to rent out to tenants.

The buyer cannot be a permanent resident. Most BTL mortgages are offered on an interest only basis, with the borrower settling the monthly interest payments using the rental income generated by the property.

What is the difference between a buy-to-let and residential mortgage?

The way lenders assess this product is the main difference between these mortgage types. Residential mortgages are assessed based on your personal financial circumstances.

BTL loans are based on the property’s profitability, i.e. how much rent it will generate offset against the cost of the loan. While elements of personal affordability will be taken into account, the viability of the investment is often the deciding factor.

Another key difference is that BTL mortgages often come with a minimum salary requirement – between £20,000 and £25,000 is standard.

What are the advantages and disadvantages of investing?

Advantages of a buy-to-let mortgage

  • Long term investment gains:
    Although the property market can fluctuate, the general trend is for house prices in the UK to rise over time.
  • The rental market is strong:
    Finding tenants for your buy-to-let property shouldn’t be too difficult, as Generation Rent is going nowhere. Moreover, recent government data revealed that renting among all age groups is more likely to be from a private landlord rather than a council or housing association.
  • Tax benefits:
    Some of the running costs associated with buy-to-let properties can be reclaimed when you submit your Self-Assessment Tax Return to HMRC each year. These include interest on your mortgage repayments, letting agent fees, repair costs, council tax and other bills (if you’re footing them yourself).

Disadvantages of a buy-to-let mortgage

  • Increased Stamp Duty:
    Since April 2016, BTL investors have been forced to fork out 3% more Stamp Duty Land Tax (SDLT) when purchasing a property. This can significantly add to the overall cost involved and means some landlords have been forced to pay several thousands more than those who invested pre-April 2016.
  • The risk of an empty property:
    There’s no guarantee your property will be occupied 100% of the time, and when it’s empty, you could be forced to foot the cost of the mortgage out of your own pocket, unless you have a good insurance deal in place.

Mortgage eligibility criteria explained

Along with your credit rating, there are a number of other factors that will affect your eligibility for a buy-to-let mortgage, including:

  • Whether you own property already:
    Some lenders require BTL borrowers to already be homeowners for a set amount of time, usually 12 months with no missed mortgage payments, while others prefer to deal with professional landlords. There are also a minority who are happy to offer credit to first-time buyers.
  • Income:
    Some lenders have a minimum income requirement of £20,000-£25,000, but others may be happy to base their decision on the strength of the investment. For applications where income is a factor, most lenders prefer it to come from secure, full-time employment, but there are specialists who are willing to offer BTL deals to self-employed borrowers, those who trade as a limited company, and those with ‘non-standard’ income, such as benefits, pensions, bonuses and commission. Rental income from other BTL properties can be factored in too, and most lenders will insist that this is declared to HMRC.
  • Deposit:
    Buy-to-let mortgages typically come with higher deposit requirements to standard residential home loans. See the next section for further information.

Buy-to-let LTV: How much deposit do I need?

The minimum deposit needed for a buy-to-let is now just 15% with some lenders, so you could get an 85% LTV mortgage. However, in order to achieve a mortgage with this LTV rate you would require both a suitable property and sufficient rental income. The LTV is the loan to value ratio, which means the size of the loan compared to the value of the property, expressed as a percentage.

So, a property worth £100,000 and a loan of £75,000 = 75% LTV. Typically, buy-to-let mortgage LTVs are capped at 75% with most lenders. A deposit of 25% is required, though in certain circumstances, 80-85% deals are available.

The impact buy-to-let loan to value has on rates is huge, as it’s a big factor for the lenders when pricing the level of risk. A high LTV equates to higher risk of them not recouping money in the event of default, which in turn means higher rates.

Can I use equity for my deposit?

The short answer is ‘yes’. If you have equity in your home, you can take out a second mortgage. The usual criteria apply such as income, affordability and credit history.

What are rental returns?

A simple example is that if your rental return was equal to the interest payments, then the rental coverage would be 100%. It should be noted that most lenders prefer the rental cover to be at least 125% or higher – if that’s the case, you’ll stand a better chance of getting the best rates for buy-to-let finance.

What is a stress test?

It’s simply a way that lenders assess the viability of a property you’re hoping to buy and let out. Buy-to-let stress tests are a way to check that you have the ability to repay the interest on the mortgage.

For instance, if you have a £150,000 mortgage and a 5.5% interest cover rate is applied, this brings your monthly interest payments to £687.50.

The equation is £150,000 x 5.5% = £8,250 / 12 months = £687.50. By factoring in the rate for the rental income of 125%, for the purposes of stress testing, this brings the real monthly costs to £859.38.

What is buy-to-let rental yield?

Put simply, the rental yield is the amount of cash that your rental property generates, calculated as a percentage of the property’s value. This can be broken down into gross yield and net yield. It lets you see your buy-to-let returns on investment at a glance.

How do you work out the yield?

To calculate the yield on your buy-to-let divide the purchase price of your property with yearly rent. If the purchase price is £100,000 and the rent is £200 per week, then the annual rent is £10,400 and your buy-to-let property yield is 10.4%.

This calculation should give you a good idea how much you’ll need to make to finance your buy-to-let mortgage.

What yield should I expect from a ‘buy to let’?

There are several factors that will influence the buy-to-let average yield, with location and tenant demand being prime drivers. Ideally, you should look for a property that will generate a rental yield of around 8% or higher which would be a good buy-to-let yield.

Should I purchase a buy-to-let with tenants in situ?

The upside of buying a property with current tenants is that it could mean an income from day one. However, bear in mind that you may inherit the previous landlord’s obligations too.

Generally, lenders will be OK with tenants in situ if there is a proper tenancy agreement in place.

How does buy-to-let rent guarantee work?

A tenant who can’t or won’t pay the rent can be your worst nightmare. There are landlord insurance policies available; but be aware that these usually don’t pay out if the tenant falls into arrears, they only pay out for lost rent if the property becomes uninhabitable.

To protect against tenants defaulting, you’ll need specialist rent guarantee protection. Buy-to-let rental cover usually requires certain conditions, including that the landlord has an Assured Shorthold Tenancy Agreement in place and that the tenant has passed the appropriate credit and reference checks.

Can you have a buy-to-let AND a residential mortgage?

Yes. In fact, the BTL lending criteria at most lenders requires that you own a residential property (usually for at least 6 months, although some lenders will be happy with less) before they will accept an application for a buy-to-let mortgage.

Can you live in a property you have a buy-to-let mortgage on?

Not usually. Buy to let mortgages are for properties that you plan to let out to tenants. If your circumstances change and you need to move into your buy to let, most lenders will require you to remortgage onto a BTL deal.

Does a second mortgage have to be for buy to let?

Not at all – these products are by no means buy to let only. You can take out a second mortgage on a property you already for a variety of purposes, from home improvements to consolidating debts.

This is often known as a homeowner loan. It is also possible to take out a second mortgage on a residential property you plan to live in part time or use as a holiday home.

Is a joint ‘buy to let’ mortgage allowed?

Yes. Most married couples are considered to have a joint mortgage. Many lenders’ buy-to-let mortgage terms allow up to four applicants and sometimes more on a buy-to-let.

You can have a joint mortgage on a buy-to-let property with a parent, friends and siblings, but you need to be sure you all have the same expectations from the property.

Can I have one in my wife’s name?

Yes, you can. There are various tax advantages to be had, especially if you are the higher earner, with a correspondingly higher tax bill.

If your partner earns less, then putting the property into their name for tax purposes makes sense. We work with specialist buy to let mortgage intermediaries who can advise you.

Can I get a fast track buy to let mortgage?

Every application is different, but the reality is that the average time from your first enquiry to completion, is somewhere around 4-6 weeks.

Can I get a buy-to-let new build?

Yes, and there generally won’t be any differences to consider compared to a buy-to-let mortgage on an older property, as far as the lender is concerned. Property type will only come into play if you’re getting a buy-to-let mortgage on a flat rather than a house, or if the property has elements of non-standard construction.

Can I get a buy-to-let mortgage on more than one property?

Absolutely, but a specialist BTL or commercial lender is often recommended for these applications.

To secure a second buy-to-let property, the lender may require equity or a deposit of at least 20% to safeguard themselves against the increased risk.

If you’re a buy-to-let landlord with 4 properties or more, you’re considered a portfolio landlord, and they require lenders who specialise in this niche sector of the market.

Can I get help to buy?

In a word. No. The government Help to Buy schemes, such as the Lifetime ISA, are specifically designed to help people get onto the property ladder, not build rental portfolios.

They have a clause that states the property ‘must not be rented out’ after you buy it. If your circumstances change (such as losing your job or being transferred overseas), you may be able to rent the property out but, essentially, you cannot use a Help to Buy scheme for a buy-to-let.

I’m an expat, could I get a buy-to-let mortgage?

Yes, there are expat mortgages for buy-to-let properties. These are not as straightforward as a standard buy-to-let mortgage, though. Some lenders offer expat buy-to-let mortgages, but you’ll need to have a broker compare the market for the best deals.

Your best option is to talk to one of the specialist advisors we work with and let them find the best expat buy-to-let mortgages in the UK.

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We’ll connect you with one of the specialist brokers we work with who will be happy to answer all your questions and find the right buy-to-let mortgage at the best available rates for you.

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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the brokers we introduce you to, to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All brokers we introduce you to are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.