Buy-to-let mortgages

Save money on interest and fees with the right buy-to-let mortgage.

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What is a buy-to-let mortgage?

A buy-to-let mortgage is a mortgage for people who want to buy a property, whether a house or a flat, then rent the property out to tenants. Buy-to-let mortgages generally need a larger deposit than residential mortgages and the interest rates are typically higher. You should be aware that buy-to-let mortgages being bought as an investment are not usually regulated by the Financial Conduct Authority (FCA). However, if you or your family plan to live in the property, it is likely to be regulated by the FCA, like a residential mortgage.

Who are buy-to-let mortgages for?

A buy-to-let mortgage is often a great option for people looking to make a large investment or actively enter the rental property market. Whether it’s your first venture into property management, or you’ve been building up a portfolio of rental properties, the right buy-to-let mortgage can unleash your investment potential. Buy-to-let mortgages do work differently to residential mortgages, so you should check whether you’re eligible and can afford this type of mortgage.

How do buy-to-let mortgages work?

With buy-to-let mortgages, you still have the option for a capital repayment or an interest-only mortgage, however, many investors choose interest only. This means that you’ll only pay off the interest of the loan each month, and therefore won’t pay off the borrowed balance until the term ends.

Landlords tend to pick an interest-only mortgage, because it reduces your monthly payments significantly, allowing you to maximise your rental earnings potential. Landlords then use their rental income to pay off the interest each month. However, you’ll need to keep in mind the amount you owe if you decide to sell the property.

How much can I borrow for a buy-to-let mortgage?

The amount you can borrow with a buy-to-let mortgage depends on how much you’re expecting to earn in rental income. Your lender will want to know this, to reassure them that their investment is safe. Usually, they’ll want to see income which is above your mortgage repayment by somewhere between 20-30%. To get an idea of what you can expect to make from a property, you should research online or contact a letting agent. Once you have an idea of what you could make on a property, you should be able to work out if you could potentially borrow enough to buy it.

What are the interest rates for a buy-to-let mortgage?

The interest rates for mortgages differ, depending on whether you’re taking out a buy-to-let mortgage or a residential mortgage.

Usually, a buy-to-let mortgage requires a larger deposit and will incur a higher rate of interest. This is because lenders often seek extra security, considering that there could be periods with no tenant while renting out a property, or the tenant may fail to keep up with their payments. This can then lead to the landlord deferring on their mortgage payments.

The rate also depends on the type of mortgage you’re on, how much you’re borrowing and the rent you expect to earn on the property.

Buy-to-let mortgage types:

  • Fixed-rate mortgage – a fixed repayment amount over a specified period. Typically, the longer the fixed period, the higher the level of interest.
  • Discount variable mortgage – this takes the lender’s standard variable mortgage rate and applies a set discount. If the variable rate fluctuates, yours will alongside it, but the discount remains the same.
  • Tracker mortgage – almost the opposite of a discount variable mortgage. The rate of interest is set at a percentage above the variable rate, but it’s the Bank of England’s base rate that it’s marked up against. If this rate fluctuates, yours will too.

Should I get a fixed or variable interest rate?

Whichever type you choose will depend on your personal circumstances and preferences.

  • Variable rate mortgages: Your payments could go up or down as interest rates  change. They’re usually either tracker mortgages– where the interest rate is fixed at a rate above the standard Bank of England base rate. Or fully variable – where the lender decides on a rate and can change this at any time.
  • Fixed rate mortgage: Your interest rate and your monthly payments will remain the same for an agreed length of time. A fixed rate mortgage is usually fixed for two, three or five years, but other terms are available.  At the end of the deal, you’ll usually be switched to your lender’s standard rate of interest unless you re-fix or switch.

What are the criteria to get a buy-to-let mortgage?

To be eligible for a buy-to-let mortgage, you must fit some specific criteria. You’ll usually need to either own your own home outright or have an existing mortgage on it. It will also be much easier if you have a good credit history and you don’t have large levels of existing debt.

Lenders also usually set an upper age limit – normally you can’t be older than 70 or 75 when the mortgage term comes to an end.

Buy to let mortgages and tax

When you buy a property through buy-to-let, there are a few tax things you need to know about.

As well as the standard Stamp Duty (or equivalent) tax you’ll need to pay, buy-to-let mortgages need to pay an extra 3% of the purchase price.

And, while you might be disappointed about that extra 3%, I’m afraid you’ll also need to pay income tax on the rental income you make, over and above your annual Capital Gains Tax exemption. This won’t usually apply for periods you lived in the property as your main residence. Although, you are entitled to some tax relief for costs related to the property.

Finally, if you decide to pack it in and sell up, you’ll also need to pay Capital Gains Tax on any profit you might make.

Which lenders do we compare?

At Compare the Market, we compare mortgages from the big banks such as Barclays, HSBC and NatWest, as well as supermarket lenders, like Sainsbury’s Bank and Tesco Bank, and insurance providers such as The AA and First Direct.

Frequently asked questions

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

The first major difference between a buy-to-let mortgage and a residential mortgage is the deposit required for buy-to-let. A buy-to-let mortgage usually requires a deposit at least double the size of a residential property equivalent, as providers seek reassurance over your ability to meet your payments.

The other main difference is that there is a reverse in the trend of capital repayment and interest only. For buy-to-let mortgages, it’s far more common for offers to be made on an interest-only basis. This means you’ll only be paying the interest which accrues on the amount borrowed, and therefore won’t pay off the balance until the term ends. This reduces your monthly payments significantly, but means you won’t own the property outright at the end of the term, unless you make extra payments. You could either pay off the balance in full, perhaps with the money you’ve saved over the mortgage’s term or by selling the property, or you can take out a new mortgage term and keep going, subject to the lender’s criteria.

There’s also a difference in certain fees, such as stamp duty, when the property isn’t being used as your home. You should keep these extra fees in mind when considering entering a buy-to-let mortgage agreement.

Is a buy-to-let mortgage cheaper than a standard mortgage?

Not always. Most buy-to-let mortgages are interest-only loans and therefore the monthly repayments can be cheaper than a repayment mortgage. However, you’re likely to need a deposit of at least 20% before you’re able to borrow and overall fees tend to be higher.

The  amount you are able to borrow  is also  worked out  slightly differently, being based on potential rental income as well as loan-to-value ratio (LTV).

How much deposit do I need for a buy-to-let mortgage?

For a buy-to-let mortgage, you’ll need a considerably large deposit compared to a residential mortgage. Different mortgage providers will vary, but the typical deposit amounts will start at 20% of the property’s value, which is double the usual deposit for a residential mortgage. However, some buy-to-let mortgage providers can require deposits as large as 40%. 
Buy-to-let mortgages require a larger deposit to provide confidence to the lender. With renting a property out, you’re subject to the potential of a temporarily vacant property, or a tenant who defaults on their rent. Providers seek reassurance that you’ll be able to keep up with your payments each month.

Why can’t I get a residential mortgage and rent out the property?

In some cases, a residential mortgage will have a clause that stops you from renting out your property to make money, including Airbnb style rental. Lenders have different policies on this and it’s best to check first. Ignoring that and going ahead anyway could land you in legal trouble.

Worst case your lender may decide you’re in breach of your mortgage terms and demand the mortgage is repaid immediately. Best to get the right mortgage for the job.

Switching from a residential mortgage to a buy-to-let mortgage is actually quite common. If your circumstances change, you may find yourself wanting to rent out your former home, turning it into more of an investment after moving out. Many lenders will let you make the switch, but you’ll need to consult with yours to be sure. You may even consider remortgaging your home, but you need to make sure that this makes sense for you, taking into consideration any early release penalties, etc.

Should I get a repayment or interest only buy-to-let mortgage?

When you have an interest only mortgage, you pay only the interest on the loan and nothing off the capital. This means that at the end of the term, you’ll still need to find the funds to pay off the outstanding capital balance.

With repayment mortgages, you pay off the interest and some of the overall cost of the property each month. At the end of your repayment term, you’ll have paid off both the price of the house – the capital – and the interest on it.

Can I afford a buy-to-let mortgage?

There are a few things to consider, to see if you can afford a buy-to-let mortgage:

  1. Mortgage costs: Your buy-to-let mortgage rate may vary according to the type of mortgage you go for - make sure you’ve factored in any extra costs in the future as well.
  2. Rental income: How much you can borrow is going to depend upon what rental income you’re likely to achieve. Your lender will have a view but it’s useful to do your homework around the potential rent you can charge.
  3. Unlet periods: As well as considering the rental income, remember there may be times when your property isn’t rented out. Make sure you have savings or other income to cover for those periods.

Why might a buy to let mortgage application be declined?

There are several reasons why your buy-to-let mortgage application could be rejected. Here are some of the more common ones:

  • Your projected rental income isn’t enough – this is a big one. Your lender will want to see that you can make a specific amount more in rental income, compared to your monthly mortgage repayment. Different lenders have different requirements, so it’s worth comparing lenders.
  • You’ve reached your borrowing limit – mortgage lenders will have limits on how much they’ll lend a person. This could be a financial limit, a limit to the number of mortgages you can take out at one time, or both. Lenders don’t want you to have too much on your plate, as they’ll see that as a risk.
  • You have too many properties with too high an LTV – if you have a few properties on the go already under buy-to-let, you’ll be what they call a ‘portfolio landlord’. If this is the case, and your existing buy-to-let mortgages have a loan-to-value (LTV) ratio of higher than, say, 75%, this could be an issue, as you already owe a large amount.

What additional fees do I need to pay on a buy-to-let property?

  • Letting agency fees: a letting agency will charge fees to manage your property.
  • Stamp duty: When it comes to buying the property, there’s now an additional 3% stamp duty to pay on buy-to-let mortgages. Use our stamp duty calculator to find out more.
  • Income tax on your rental income: the income you earn through your buy-to-let property will be subject to income tax. However, you’ll be able to offset 25% of your mortgage interest payments against your rental income, while the other 75% will qualify for a 20% tax credit.
  • Maintenance costs: You’ll also need to make sure that you build in an allowance for maintenance costs. Things do break down and repairs will be your responsibility.
  • Landlord insurance: this can include many things, including buildings insurance, unoccupied property cover (if the property is vacant between tenants), as well as rental protection insurance. Rental protection insurance protects your rental income if you’re unable to rent out the property due to damages. You can also protect yourself from tenants who default, covering you for any lost rent.
  • Buildings insurance: while you’re not responsible for the contents (it’s up to the occupant to protect their possessions), you are liable for the building itself. This does include built-in furniture, which can include wardrobes and fitted kitchens etc.
  • Capital gains tax: if you later go on to sell your buy-to-let property, you’ll be subject to capital gains tax. The capital gains tax-free allowance is currently £12,300, which means any profit beyond this, assuming you don’t also make capital gains on other assets for the year, will be liable for tax.

How can I compare buy-to-let mortgages?

When comparing buy-to-let mortgages, here are the key things to look out for:

  • The initial mortgage rate – this is key, as it’ll be what sets your monthly repayments. The lower the rate, the cheaper your monthly repayments will be. Compare buy-to-let mortgage rates with us, to find a cheap rate for you.
  • Fees – on top of the mortgage rate, you’ll want to keep an eye out for any additional fees. These can come in all forms and sizes, so just read the wording carefully and don’t hesitate to ask if you’re unsure.
  • The overall cost – while the rate will set your monthly repayments and the fees will add on top, you’ll want to get an overall view as to how much this buy-to-let mortgage is going to cost you. You’ll be planning your rental strategy around this, so you need to make sure that it’s affordable, even if the property is left vacant between tenants.

Comparing buy-to-let mortgages can be time consuming, but that’s where we can help. Use our comparison service to find out what deals are available for you today, and fast track your way to becoming a landlord. Remember to check out  landlord home insurance  while you’re here.