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What is a buy-to-let mortgage?

A buy-to-let mortgage is a secured loan 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.

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.

Frequently asked questions

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 15% 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).

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.

Can I change my mortgage to a buy-to-let?

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.

What makes you eligible for 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.

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.

 

What additional fees come with being a landlord?

  • 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 the government’s Stamp Duty site to find the latest rates.
  • 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.
  • Health and Safety rules: Remember to ensure that you comply with all health and safety regulations when you become a landlord.

How can I compare buy-to-let mortgages?

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.

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