Buy-to-let mortgages

A buy-to-let mortgage is designed for people who want to buy a property to rent out. While it works in a similar way to a standard residential mortgage, there are some important differences.

You’ll usually need a larger deposit, and interest rates and fees are often higher. The amount you can borrow is typically based on the potential rental income from the property, rather than just your salary.

Many landlords opt for interest-only mortgages, which means you only pay the monthly interest and must repay the full loan at the end of the term. Lenders also tend to apply stricter criteria, as buy-to-let mortgages are considered higher risk.

As well as your mortgage, you may need to budget for additional costs, including Stamp Duty Land Tax (SDLT), income tax on rental income, Capital Gains Tax (CGT) when you sell, maintenance and repairs, landlord insurance, letting agent fees and legally required safety checks. Tax rules and allowances depend on your individual circumstances and can change over time.

Income tax on your rental income

Any profit you earn from your buy-to-let property may be subject to Income Tax after deducting allowable expenses and any available allowances. You may be able to claim the £1,000 Property Allowance; however, if you do, you generally cannot also claim actual allowable expenses. Common allowable expenses include letting agent fees, insurance, repairs and maintenance, and certain property running costs paid by the landlord. Individual landlords can normally claim a tax reduction equal to 20% of their mortgage interest and other finance costs.

Capital Gains Tax

If you sell your buy-to-let property, you may have to pay Capital Gains Tax on any gain you make after deducting allowable costs, losses and your annual CGT exemption (£3,000). The rate of CGT on residential property gains is generally 18% for basic-rate taxpayers and 24% for higher- and additional-rate taxpayers.

Most buy-to-let mortgages are interest-only, so monthly repayments can be cheaper than a repayment mortgage. But you’re most likely to need a deposit of around 25%. Fees for buy-to-let mortgages also tend to be higher.

At the end of an interest-only mortgage term, you’ll need to pay off the money you borrowed in full.

Because you pay interest on the full loan amount for the length of the loan term, an interest-only mortgage could cost you more overall.

Residential mortgages usually have a clause that stops you renting out your property to make money, including Airbnb-style rental. Ignoring such a clause could land you in trouble as you’ll be committing mortgage fraud.

As a worst-case scenario, your lender may decide you’re in breach of your mortgage term. They may demand the mortgage is repaid immediately or they’ll repossess the property.

The only exception is if you want to rent out your main home for a short period. In this case, you can ask your residential mortgage provider if they’ll give you consent to let.

If you want to rent your property to an immediate family member, you’ll need a regulated buy-to let-mortgage. This is sometimes called a family buy-to-let mortgage.

A regulated buy-to let-mortgage is different to a standard buy-to-let. There aren’t many lenders who offer this type of loan.

You’ll need a holiday let mortgage if you want to rent out your property to multiple guests for short periods of time. Buy-to-let mortgages are designed for properties that will be let out to tenants on a longer-term basis.

You may need to look for a specialist provider to find a holiday let mortgage. You’ll also need specific holiday home insurance.

You’ll need your lender’s approval to switch your residential mortgage to a buy-to-let mortgage.

But your existing lender will only show you its current rates. It’s a good idea to shop around for the best buy-to-let mortgage rates, as you might find a better deal to suit your needs.

There are all sorts of reasons your application might be declined, and it's worth asking the lender or your broker so you can try and fix the issue before applying elsewhere.

Common reasons might include concerns about your credit history or your projected rental income not being high enough. Or you might have a loan-to-value (LTV) ratio that’s considered too high.

Some lenders will only allow you to take out one or two BTL mortgages. But if you have the required deposits and the rental income to cover the repayments, other lenders will let you have multiple buy-to-let mortgages.

Once you have four or more buy-to-let mortgaged properties, you’ll be classed as a portfolio landlord.

It can be a lot more difficult to find a buy-to-let mortgage as a first-time buyer. This is because some lenders ask that you already own your own home – whether with a mortgage or outright.

If you’re considering a buy-to-let investment as a first-time buyer, you may want to seek the help of an expert mortgage advisor. They’ll be able to advise you on your options and help you find the right solution for your needs.

Yes, you can get a buy-to-let remortgage. It works much the same as a residential remortgage.

You can remortgage a buy to let property at any time. For example, you may want to remortgage your buy-to-let property to get a better deal. Or you might want to use the equity in your first property as a deposit for a second property.

Bear in mind that you may have to pay an early repayment charge to leave your current deal early.