Buy-to-let mortgages explained
Buy-to-let (BTL) mortgages are for landlords who buy property to rent it out. The rules around buy-to-let mortgages are similar to those around regular mortgages, but there are some key differences. Read on for more information about how they work, how to get one and what mistakes to avoid.
- Who can get a buy-to-let mortgage?
- How do buy-to-let mortgages work?
- How much you can you borrow for buy-to-let mortgages
- Where to get a buy-to-let mortgage
- Plan for times when there’s no rent coming in
- Don’t rely on selling the property to repay the mortgage
- Buy-to-let and tax
Who can get a buy-to-let mortgage?
You can get a buy-to-let mortgage if:
- You want to invest in houses or flats.
- You can afford to take a risk. Investing in property is risky, so you shouldn’t take out a BTL mortgage if you can’t afford to take that risk.
- You already own your own home. You’ll struggle to get a buy-to-let mortgage if you don’t already own your own home, whether outright or with an outstanding mortgage.
- You have a good credit record and aren’t stretched too much on your other borrowings such as your existing mortgage and credit cards.
- You earn £25,000+ a year. Otherwise you might struggle to get a lender to approve your buy-to-let mortgage.
- You’re under a certain age. Lenders have upper age limits, typically between 70 or 75. This is the oldest you can be when the mortgage ends not when it starts. For example, if you are 45 when you take out a 25-year mortgage it will finish when you’re 70.
How do buy-to-let mortgages work?
Use the Mortgage calculator to work out what your monthly payments would be.
Buy-to-let mortgages are a lot like ordinary mortgages, but with some key differences:
- Interest rates on buy-to-let mortgages are usually higher.
- The fees also tend to be much higher.
- The minimum deposit for a buy-to-let mortgage is usually 25% of the property’s value (although it can vary between 20-40%).
- Most BTL mortgages are interest-only. This means you don’t pay anything each month, but at the end of the mortgage term you repay the capital in full.
- Most BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA). There are exceptions, for example, if you wish to let the property to a close family member (e.g. spouse, civil partner, child, grandparent, parent or sibling). These are often referred to as a consumer buy to let mortgages and are assessed according to the same strict affordability rules as a residential mortgage.
Remember that If you’re taking out a BTL mortgage from a lender that is FCA authorised, they are expected to treat you fairly.
How much you can you borrow for buy-to-let mortgages
To find out how much you can afford to borrow, use the Mortgage affordability calculator.
The maximum you can borrow is linked to the amount of rental income you expect to receive.
Lenders typically need the rental income to be a 25–30% higher than your mortgage payment.
To find out what your rent might be talk to local letting agents, or check the local press and online to find out how much similar properties are rented for.
Where to get a buy-to-let mortgage
Most of the big banks and some specialist lenders offer BTL mortgages.
It’s a good idea to talk to a mortgage broker before you take out a buy-to-let mortgage, as they will help you choose the most suitable deal for you.
Using price comparison websites
Comparison websites are a good starting point for anyone trying to find a mortgage tailored to their needs.
We recommend the following websites for comparing mortgages:
- Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
- It is also important to do some research into the type of product and features you need before making a purchase or changing supplier.
Plan for times when there’s no rent coming in
Don’t assume that your property will always have tenants.
There will almost certainly be ‘voids’ when the property is unoccupied or rent isn’t paid and you’ll need to have a financial ‘cushion’ to meet your mortgage payments. When you do have rent coming in, use some of it to top up your savings account.
You might also need savings for major repair bills. For example, the boiler might break down, or there might be a blocked drain.
Don’t rely on selling the property to repay the mortgage
Stamp Duty Land Tax (SDLT)for buy to let properties is an extra 3% on top of the current SDLT rate bands for properties above £40,000. Find out more in Everything you need to know about Stamp Duty.
Don’t fall into the trap of assuming you’ll be able to sell the property to repay the mortgage.
If house prices fall, you might not be able to sell for as much as you had hoped. If this happens, you’ll be left to make up the difference on the mortgage.
Buy-to-let and tax
If you sell your buy-to-let property for profit, you will pay Capital Gains Tax if your gain exceeds the annual Capital Gains Tax threshold.
Also, rental income that exceeds your mortgage interest payments and certain allowable expenses are liable to Income Tax.