Buy-to-Let Mortgage Advice

Buy-to-let mortgages are designed to help prospective landlords purchase properties that they plan to rent out to tenants. Like with a traditional mortgage, a bank or building society will fund the purchase of an investment property, and the borrower will be required to make repayments over the agreed mortgage term.

While a residential mortgage helps a borrower to buy a home to live in, a buy-to-let mortgage is primarily a form of investment. This is because landlords use their properties to generate income. The idea is that this income should cover their monthly mortgage repayments, maintenance, insurance of the property, and leave them with a profit. Plus, assuming that their property continues to increase in value during their mortgage term, landlords can make a capital gain by eventually selling up.

There are lots of technicalities and rules you need to be aware of if you’re thinking about taking out a buy-to-let mortgage, though. So, here, you’ll find a great deal of helpful information and the answers to questions such as:

• What is a buy-to-let mortgage?
• Is a buy-to-let mortgage like a standard mortgage?
• How do buy-to-let mortgages work?
• Are buy-to-let mortgages regulated?
• Can you change your mortgage to a buy-to-let?
• How can you find the best buy-to-let mortgage rates?
• How much stamp duty will you pay on a buy-to-let mortgage?
• How much is a buy-to-let mortgage deposit?
• Can you get a buy-to-let mortgage as a first-time buyer?
• Do you need buy-to-let insurance?
• How much can you borrow with a buy-to-let mortgage?
• Can I remortgage a buy-to-let property?
• How many buy-to-let mortgages can I have?
• Buy-to-let mortgage requirements
• What are the buy-to-let costs you need to be aware of?
• Can I live in my buy-to-let property?
• Can I get a buy-to-let mortgage as a limited company?
• How can we help you secure the best buy-to-let mortgage?

Read on to find out more.

What is a buy-to-let mortgage?

Buy-to-let mortgages are designed to help you purchase a property that you plan to rent out to other people. Taking out a buy-to-let mortgage can be a great idea if you’re looking to build more income streams or expand your property portfolio.

Buy-to-let mortgages are primarily forms of investment, and you can’t live in a buy-to-let property without getting permission from your lender first.

Is a buy-to-let mortgage like a standard mortgage?

Like a standard mortgage, the debt you take on is secured against the property. However, a buy-to-let mortgage rate is mainly assessed on rental income, as well as your own finances.

Your mortgage will probably be the largest ongoing cost of your property, so getting the right deal is going to impact the performance of your investment. One of the best ways to secure a good rate is to seek the advice of an expert buy-to-let mortgage broker. Here at The Mortgage Genie, our specialists can work with you to find the product that will benefit your portfolio the most, delivering the best return on your investment.

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Other differences between a buy-to-let mortgage and a standard mortgage include:

• Interest rates: The interest rates for a buy-to-let mortgage are generally higher than those for a residential mortgage.
• Deposit: The deposit needed for a buy-to-let mortgage is typically higher than for a normal residential mortgage. The minimum deposit required is usually 20% of the property value.
• Arrangement fees: Arrangement fees for a buy-to-let mortgage can be higher than on a residential loan.

So, it’s worth keeping in mind that there are likely to be some higher costs associated with taking out a buy-to-let mortgage compared to a loan for a house you plan to live in.

How do buy-to-let mortgages work?

Buy-to-let mortgages work in a similar way to residential mortgages: you’ll receive a loan to cover the purchase price of your property, and will then be required to make monthly payments over the agreed term. There are two types of buy-to-let mortgage you can take out: repayment and interest-only. Let’s take a look at how these differ.

Interest-only buy-to-let mortgages

As you might expect, a buy-to-let loan is made up of two sums: the amount you’ve borrowed, and the interest, which is the borrowing fee charged by your bank or building society.

If you take out a buy-to-let mortgage that’s interest-only, you’ll only pay back the interest that you owe each month, but nothing will be paid off the capital that you’ve borrowed. This means that, when your mortgage term comes to an end, you’ll need to pay back the full capital amount. This can be done by selling the property, remortgaging, or using other savings or assets to clear the remaining debt.

Interest-only mortgages are particularly popular among landlords because they can help to keep your monthly outgoings as low as possible. This, therefore, maximises your profits. They’re also an attractive option for investors who are trying to build a large property portfolio because this approach allows them to build up a lucrative cash flow that they can then reinvest.

There’s always an element of risk when investing in rental properties because, if you don’t have a way to pay off the rest of your loan at the end of your mortgage term, you’ll need to either sell the property or remortgage. And, if the value of the property has depreciated since buying, you could be left out of pocket. For this reason, investors tend to choose properties that they think will increase in value, but there’s no guarantee due to the fact the housing market is always fluctuating.

Repayment buy-to-let mortgages

If you take out a repayment buy-to-let mortgage, you’ll pay both the interest and a portion of the capital each month. This means that, at the end of the term, you’ll own the property outright and won’t need to pay off the capital. However, this does mean that your monthly outgoings will be higher.

Repayment buy-to-let mortgages are a more popular option for investors with just one or two rental properties because there’s no need to worry about repaying the capital at the end of the term. However, they are less profitable during the mortgage term.

Ultimately, the best mortgage type will depend on your personal investment strategy and long-term goals. Your financial advisor and mortgage broker will be able to help you work out which is best for your circumstances.

Are buy-to-let mortgages regulated?

Generally speaking, buy-to-let mortgages are considered investment schemes and classed as business transactions. As a result, they aren’t usually regulated by the Financial Conduct Authority (FCA).

If you take out a standard mortgage for a property you intend to live in, there are a number of protections and affordability regulations in place to help limit the possibility of you ever losing your home. This means that every stage of the borrowing process is controlled and regulated by a strict set of rules, which your lender must follow.

As buy-to-let properties are treated as investments, the protections and regulations that help to shield residential homeowners do not apply to buy-to-let mortgages. Professional landlords are not perceived to need the same supervision and protection as ordinary consumers, so the affordability tests are less stringent. There are also fewer protections in place to protect buy-to-let landlords who get into mortgage arrears.

There are some exceptions to this rule, though. For example, if you buy a property that you intend to rent out to a close relative, this will be considered a “consumer buy-to-let” and will be regulated just like a standard residential mortgage. So-called accidental landlords — those who have acquired a rental property through marriage or an inheritance — can also qualify for FCA regulation, provided they can prove they didn’t buy the property with the intention of becoming a professional landlord.

Can you change your mortgage to a buy-to-let?

There are lots of reasons you may wish to change your mortgage to a buy-to-let: you may have a home under a traditional residential mortgage sitting empty, or you might want to move to another property and rent out your current home. Residential mortgage agreements don’t allow borrowers to let their homes during the term of the mortgage, which is why you’ll need to contact your lender if you want to move tenants in and start charging them rent.

One option is asking your lender for ‘consent to let’. This is where your mortgage provider agrees to let you rent out your home for a set amount of time, and is usually allowed if the property will only be let for a short period — while you’re travelling, for instance. Occasionally, lenders will allow you to rent out your home without raising the rates, while others will insist that you switch your mortgage to a buy-to-let agreement.

Your current lender may agree to transfer your existing mortgage to a buy-to-let mortgage, but that doesn’t necessarily mean that you’ll be offered a competitive rate. So, you’ll want to shop around to find the best deal. Get in touch with our professional brokers on 033 33 44 33 72, who will be able to crunch the numbers and find the right buy-to-let mortgage for you.

How can you find the best buy-to-let mortgage rates?

A buy-to-let mortgage will typically be more expensive than a residential mortgage. Plus, the associated costs and fees can be significantly higher. So, to ensure you make a worthwhile investment and protect your profit margins, you’ll want to secure the best possible rate.

To find the best mortgage to suit your requirements, we would always recommend enlisting the help of a mortgage broker. They will typically have a strong network of professional connections, as well as access to exclusive deals that will help you keep your outgoings as low as possible.

Here at The Mortgage Genie, we have a team of expert mortgage brokers who have helped countless landlords secure the best buy-to-let mortgage interest rates to suit their needs. If you would like us to do the same for you, get in touch today and we’ll be more than happy to help you.

How much stamp duty will you pay on a buy-to-let mortgage?

When purchasing a property with a buy-to-let mortgage, you will be required to pay 3% extra in stamp duty. The exception to this is if you’ve never owned a property before and are investing in a buy-to-let property as a first-time buyer. In this situation, you will pay standard home mover rates, but won’t benefit from the stamp duty relief you would receive if you were buying your first property to live in.

Stamp duty rates for buy-to-let mortgages are tiered, just like those for residential purchases. So, the actual amount you pay will depend on the value of your chosen property. You can find out more about this on the UK government’s website.

How much is a buy-to-let mortgage deposit?

Buy-to-let mortgages are classed as business transactions, which means that the deposit amount required to take one out is usually higher than it would be for a standard mortgage.

The minimum deposit amount is usually around 25% of the property’s value, although it may be as low as 20% or as high as 40%.

Can you get a buy-to-let mortgage as a first-time buyer?

Yes, you can take out a buy-to-let mortgage as a first-time buyer, but there are a range of factors you should consider before doing this.

To begin with, lenders may see you as a high-risk borrower, since you won’t have any prior experience of maintaining a property and being a landlord. This could mean the number of lenders willing to provide you with a mortgage is smaller, and those who are open to providing you with a buy-to-let mortgage may not offer you the best rates. As a result, this could have a significant impact on your profit margins and may mean that a rental property won’t be the best investment for you.

That’s not to say it’s impossible to become a landlord as a first-time buyer — it may just be harder and more expensive.

Do you need buy-to-let insurance?

Although there’s no legal obligation for landlords to take out specialist buy-to-let insurance, doing so is a good idea to protect yourself and your investment. Different landlord insurance policies will cover different things, but they’ll typically cover:

• Loss of rent
• Contents that you own
• Damage to the property
• Claims made against you for injuries or property damage

While insurance is an additional cost, it can certainly pay for itself if you do run into trouble, so it’s typically a very wise investment.

How much can you borrow with a buy-to-let mortgage?

There’s no upper limit on how much you can borrow using a buy-to-let mortgage. Exactly how much you can take out is at the discretion of the lender, who will base their judgement on the usual lending criteria. Buy-to-let mortgages may run from a few thousand pounds to in excess of a million — the only real limit is what a lender judges to be worth the risk.

In terms of what loan to value (LTV) you can expect, it’s possible to find buy-to-let mortgages with around 85% LTV, although the majority of rates available offer 75% LTV. Providers won’t lend more than this as there’s no guarantee that your investment will retain or increase its value.

Can I remortgage a buy-to-let property?

Almost any property can be remortgaged, including buy-to-lets, as long as you’re not in negative equity and can satisfy the lender’s eligibility criteria. Many landlords decide to remortgage their properties in order to free up equity or to lock down a cheaper rate. Those on interest-only mortgages may also opt to remortgage their property to extend the loan once the agreed term ends.

For many landlords, remortgaging can be a lucrative way to cut monthly overheads and maximise profits. But, as with any other type of mortgage, you may have to pay an early repayment fee if you decide to switch before the fixed-rate period ends. So, your remortgage should be carefully timed.

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How many buy-to-let mortgages can I have?

There is no cap on the number of buy-to-let mortgages you can have, although lenders may set different limits on the number of mortgages you can take out with them. The bigger banks and building societies will normally allow borrowers to take out around 3–5 buy-to-let mortgages, but they’ll apply their own unique risk assessment in each case. Some lenders will place no limit on the number of mortgages you can have but will cap the total amount of money you can borrow across all of your loans.

A lot of investors will spread their portfolios across different mortgage providers. There’s no legal limit on the number of mortgages you can have with multiple lenders: in fact, many investors with very large property portfolios may have hundreds of mortgages. At any rate, you’ll need to provide evidence of your existing portfolio of buy-to-let mortgages (sometimes called your ‘background properties’) when you approach a new lender for a mortgage.

Buy-to-let mortgage requirements

If you want to get a buy-to-let mortgage, you’ll need to satisfy the provider’s lending criteria. While lenders will look at factors like your salary, spending, and deposit, they’ll also scrutinise the potential rental income of your property.

Buy-to-let mortgages present a bigger risk to lenders compared to residential loans, as borrowers are more likely to fall into arrears. This means that the lending requirements for buy-to-lets are stricter than the standard eligibility criteria for ordinary residential mortgages.

Here, we’ll discuss exactly what you need for a buy-to-let mortgage to give you an idea of your chances of being approved.

Rental income

Banks and building societies will only ever issue a buy-to-let mortgage if they think you can afford the repayments. To assess this, lenders will use something called the rent-to-interest (RTI) cover calculation (also sometimes called an interest cover ratio, or ICR). This works out the ratio of potential rental income to the total interest payable across the full term of the mortgage, giving lenders a rough estimate of your ability to cover the cost of the repayments.

Essentially, this means that your lender must be confident that the property will earn enough rental income to cover the cost of the loan. To try to get an accurate idea of how much this will be, the lender will carry out a valuation of the property and work out an estimated rental income based on the current rental rates for similar properties in the area. This is then balanced against the total annual interest of the loan, creating the RTI rate.

The exact RTI rate needed varies between lenders, but most will require an estimated rental income of 125%–140% of the mortgage repayment before they’ll approve the loan. The substantial percentage difference provides a financial buffer to help stop the borrower from getting into arrears should something affect their rental income. It also allows some leeway for periods when the rental property may be vacant.

Salary

If you’re a first-time buy-to-let investor, lenders will look at your other forms of income in addition to the RTI ratio. Many lenders will require that you earn at least £25,000 before they agree to give you a loan. This is because your salary will act as a financial safety net should your tenant fall into rent arrears, or if your property is left vacant between tenancies.

Age

To ensure that you’ll be able to cover the repayments for the full duration of the term, many lenders enforce an upper age limit for buy-to-let mortgages. As such, most lenders won’t accept applicants over the age of 75. Although, under certain circumstances, some lenders will consider applicants up to 85. Some lenders will also insist on a minimum age of 25, as statistics show that younger applicants present a substantially higher risk.

If you’re taking out an interest-only loan, remember to think about how old you’ll be when the term ends and how you plan to pay back the remaining debt, as you may struggle to get a remortgage once you hit the upper age limit.

Deposit

As with any other type of mortgage, you will need to pay a deposit. Buy-to-let mortgages are riskier for lenders than residential mortgages, and this is reflected in a higher deposit amount. While the average deposit in the UK is around 15%, you can expect to pay around 20–40% of the property value for a buy-to-let, depending on the amount you want to borrow and the RTI ratio.

As with a residential mortgage, you’ll almost always be able to access better rates if you have a bigger deposit. So, while saving a larger deposit will take longer, it could help you to maximise profitability in the long run. You can learn more about this and find some ways to save in our mortgage deposit guide.

What are the buy-to-let costs you need to be aware of?

Buy-to-let mortgages present a higher risk than residential mortgages, both for the borrower and the lender. As a result, mortgage rates on a buy-to-let product are almost always higher than they would be for a typical residential mortgage — generally by around 1–3%. The various mortgage fees, including admin and arrangement fees, also tend to cost more. The exact figures vary according to both the lender and the product, so remember to weigh up all the fees and costs when comparing. This is something else a mortgage broker will be able to help you with.

Can I live in my buy-to-let property?

If you decide that you want to live in your buy-to-let property and you’re still paying the mortgage, you will need to request permission from your provider. It’s likely that the terms of your buy-to-let mortgage stipulate that your property must be rented out to tenants so, if you move in without informing your lender, you will be breaching the terms of the contract. Breaking the terms of your agreement will mean that your lender can invoke their right to call in the full value of the loan, so it’s best to be upfront and ask for consent.

If you want to live in your buy-to-let property for the long term, it’s well worth considering switching to a residential mortgage. These are regulated by the FCA, so you’ll have more protections in place, and you may be able to access cheaper rates, too.

Can I get a buy-to-let mortgage as a limited company?

Many landlords and property investors choose to buy properties through a limited company, instead of as an individual. Buying through a private company is often a better model for investors with larger portfolios, and it can also make paying tax on your earnings more efficient and affordable.

When you buy property as an individual, your rental profits will be added to anything else you earn (like a salary from your job) and you may need to pay income tax on this figure. As a limited company, you’ll pay Corporation Tax, which is currently fixed at 19%. So, you need to calculate which option is most cost-efficient for you.

The recent changes to tax relief for landlords have also made buying property through a limited company more appealing. Until April 2017, landlords could offset their mortgage interest against their rental income before calculating their tax liability. But the government has phased out this relief and it has been completely replaced with a 20% tax credit, which is far less generous than the previous relief system. Those who pay income tax at a higher rate could lose thousands of pounds.

However, this only applies to those buying property as individuals. Limited companies pay Corporation Tax, which is fixed, and so won’t be affected by the relief changes. As a result, many landlords are forming limited companies solely for the purpose of buying property. You also won’t need to pay income tax if you decide to reinvest your profits into new properties and, as Corporation Tax is fixed, you may benefit from the effects of compounding, which can lead to excellent long-term profits.

But setting up a limited company isn’t necessarily a guaranteed fix. There are other costs involved in becoming a limited company, and you’ll need to pay higher rates of stamp duty on buy-to-let purchases, too. So, you’ll need to do your research and consult a professional to help you balance the books and work out which is the best approach for you.

There’s also the issue of admin, as owning a limited company can be a lot of work. You’ll need to spend more time handling your accounts and submitting tax returns, or hire an accountant to handle this on behalf of your company. But, if you’re serious about expanding your property portfolio and maximising your rental income, it could be the right path for you. You can learn more about forming a limited company on the government portal.

How can we help you secure the best buy-to-let mortgage?

Whether you are a property professional or a first-time landlord, The Mortgage Genie can offer practical and straightforward buy-to-let mortgage advice. These are just some of the benefits of working with us:

• We have access to a comprehensive panel of buy-to-let mortgage products from the largest to the smallest lenders, including those that offer more specialist packages.
• Our team will take the time to understand your needs and find a selection of products that match them, ensuring you get the very best return on your investment.
• By letting us do the hard work, your search for the right mortgage product will be quick and easy. You can then concentrate on the other aspects of your new property.

We hope you now have a much better understanding of what a buy-to-let mortgage is, how they work, and what you need to consider before taking one out. If you want to get a rough idea of how much you’re going to be able to borrow to purchase a buy-to-let property, we have just the tool for you.

If you would like us to help you find the best buy-to-let mortgage deal that will maximise your profits, we’re here to assist you! Check out our buy-to-let mortgage calculator, which will ask you whether you’re planning to buy alone or with others, what you intend to do with the property, and how much you currently earn.

We’ll then provide you with an estimate of how much you may be able to borrow if you satisfy all the other criteria required to take out a new mortgage. Afterwards, be sure to get in touch with our team of experts today and we can get started on helping you to buy your next property!