Buy-to-Let Mortgages Explained
Buy-to-let mortgages are designed to help prospective landlords purchase properties to rent out to tenants. Like traditional mortgages, banks or building societies fund the purchase of an investment property, and borrowers must make repayments over the agreed term.
Unlike residential mortgages, which help borrowers buy a home to live in, buy-to-let mortgages are primarily investments. Landlords generate income from their properties to cover mortgage repayments, maintenance, insurance, and ideally make a profit. Additionally, if the property value rises, landlords can achieve a capital gain by selling later.
However, buy-to-let mortgages come with various technicalities and rules. Here, you'll find helpful information and answers to questions such as:
What is a buy-to-let mortgage?
A buy-to-let mortgage is specifically designed to help you purchase a property intended for rental to tenants. It can be an excellent option if you're looking to generate additional income or expand your property portfolio.
As a form of investment, buy-to-let mortgages differ from residential mortgages. You cannot live in a buy-to-let property without prior approval from your lender, as these properties are intended solely for rental purposes.
Is a buy-to-let mortgage like a standard mortgage?
While a buy-to-let mortgage shares similarities with a standard mortgage - such as being secured against the property - there are key differences. A buy-to-let mortgage is primarily assessed on the rental income the property is expected to generate, alongside your personal financial situation. Here are some key distinctions:
Interest rates: Buy-to-let mortgages have higher interest rates, typically 1-3% more, compared to residential mortgages.
Deposit: The minimum deposit required is usually higher, often at least 20% of the property’s value.
Arrangement fees: These fees are generally more expensive than those for a standard residential mortgage.
It's important to factor in these additional costs when considering a buy-to-let mortgage, as they can make it more expensive than a loan for a property you intend to live in.
How do buy-to-let mortgages work?
Buy-to-let mortgages work much like residential mortgages: you borrow money to purchase a property and repay the loan through monthly payments over an agreed term.
That said, there are two main types of buy-to-let mortgages to choose from: repayment and interest-only. Each works differently, so let’s explore how they compare.
Interest-only buy-to-let mortgages
A buy-to-let loan consists of the borrowed amount and interest. With an interest-only mortgage, you pay only the interest each month, leaving the capital to be repaid at the end of the term through selling, remortgaging, or using savings.
These mortgages are popular among landlords as they reduce monthly payments and maximise profits, especially for growing property portfolios. Yet, they come with risks. For instance, if the loan can’t be repaid at term end, you’ll need to sell or remortgage. If the property’s value has dropped, you may face losses, which is why investors typically target properties they expect to appreciate - though market fluctuations make this uncertain.
Repayment buy-to-let mortgages
With a repayment buy-to-let mortgage, you pay both the interest and part of the capital each month. By the end of the term, you’ll own the property outright, eliminating the need to repay the capital. Though, this results in higher monthly outgoings compared to an interest-only mortgage.
Repayment mortgages are often preferred by investors with one or two rental properties, as they provide peace of mind by removing the need to settle a large capital sum at the end of the term. However, they tend to be less profitable during the mortgage period due to higher monthly costs.
Choosing the right buy-to-let mortgage type depends on your investment strategy and long-term goals.
Can you change your residential mortgage to a buy-to-let?
There are many reasons you might want to switch to a buy-to-let mortgage, such as renting out a home under a residential mortgage or moving while letting your current property. Residential mortgages don’t permit letting, so you’ll need to contact your lender if you plan to rent out your home.
One option is to request ‘consent to let’, where your lender allows you to rent out your property for a limited time, often without changing your mortgage terms. For longer-term letting, lenders may require you to switch to a buy-to-let mortgage. Your current lender might offer to transfer your mortgage to a buy-to-let, but it may not come with the most competitive rate, so it’s worth shopping around for the best deal.
How much deposit is needed for a buy-to-let mortgage?
As buy-to-let mortgages are considered business transactions, the deposit required is typically higher than for a standard mortgage. The minimum deposit is usually around 25% of the property’s value, although it can range from 20% to 40%, depending on the lender and the property.
How much stamp duty will you pay on a buy-to-let mortgage?
When buying a property with a buy-to-let mortgage, you’ll need to pay an additional 5% in stamp duty. The exception is if you’re a first-time buyer investing in a buy-to-let property - here, you’ll pay standard home mover rates but won’t qualify for the stamp duty relief typically available for first-time residential purchases.
Stamp duty rates for buy-to-let properties are tiered, just like those for residential purchases, meaning the amount you pay depends on the property’s value. For more details, visit the UK government’s website.
Do you need buy-to-let insurance?
Although there's no legal requirement for landlords to have specialist buy-to-let insurance, it's highly recommended to protect both yourself and your investment. Landlord insurance policies vary, but they typically cover:
Loss of rent
Damage to property or contents you own
Claims for injuries or property damage
Property damage caused by tenants
Though insurance is an added cost, it can prove invaluable if issues arise, making it a wise investment for landlords.
How much can you borrow with a buy-to-let mortgage?
There is no fixed upper limit on how much you can borrow with a buy-to-let mortgage. The amount you can borrow depends on the lender's criteria, which typically includes the value of the property and your financial situation. Buy-to-let loans can range from a few thousand pounds to over a million, with the main factor being the lender’s assessment of risk.
In terms of loan-to-value (LTV), you can typically find buy-to-let mortgages offering up to 85% LTV, though most loans are closer to 75% LTV. Lenders usually cap this due to the uncertainty of the property’s future value.
Can I remortgage a buy-to-let property?
Yes, you can remortgage a buy-to-let property, provided you’re not in negative equity and meet the lender’s eligibility criteria. Many landlords remortgage to release equity or secure a better rate. Those with interest-only mortgages may also choose to remortgage at the end of the term to extend the loan.
For many landlords, remortgaging can help reduce monthly costs and increase profitability. Albeit, be aware that if you switch before the fixed-rate period ends, you may face an early repayment charge, so timing is key.
What is the buy-to-let mortgage eligibility criteria?
Buy-to-let mortgages are considered higher risk than residential loans. As such, the requirements for eligibility are stricter:
Rental income: Lenders use the rent-to-interest (RTI) calculation to assess whether the rental income will cover the mortgage repayments. Most lenders require estimated rental income of 125%-140% of the mortgage repayment to offer approval, providing a financial buffer for periods of vacancy or income fluctuations.
Salary: First-time buy-to-let investors often need a minimum salary of £25,000 as a safety net in case of rent arrears or vacancy.
Age: Lenders typically won’t accept applicants over 75, though some may extend this to 85. A minimum age of 25 is often required, as younger applicants are seen as higher risk. For interest-only loans, consider your age when the term ends and how you'll pay off the remaining debt.
Deposit: Buy-to-let deposits range from 20–40%, higher than residential mortgages due to the increased risk for lenders. A larger deposit can secure better rates, ultimately increasing profitability.
Credit history: Lenders usually expect a strong credit history as proof of your reliability as a borrower. If your credit score isn’t ideal, it may be worth taking the time to improve it before applying, as this can increase your chances of approval.
How to get the best buy-to-let mortgage rate
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. Whether you’re a seasoned property investor or a first-time landlord, The Mortgage Genie provides expert, straightforward buy-to-let mortgage advice. Here’s how we can help:
We have access to a wide range of buy-to-let mortgage products, including those from smaller and specialist lenders.
Our team takes the time to understand your needs and match you with the best options for maximum investment returns.
We make your search quick and easy, so you can focus on other aspects of your property journey.
Now that you have a clearer understanding of buy-to-let mortgages, you can use our buy-to-let mortgage calculator to get an estimate of how much you might be able to borrow. If you’d like personalised assistance, then get in touch with our expert brokers today by calling 01915809890 to start securing your next property!
FAQs
Can you get a buy-to-let mortgage as a first-time buyer?
Yes, you can get a buy-to-let mortgage as a first-time buyer, but there are factors to consider. Lenders may view you as a higher-risk borrower due to your lack of experience in property management, which could limit your options and result in higher rates. This may affect your profit margins and make renting less viable as an investment.
So, while it’s possible to become a landlord as a first-time buyer, it may be more challenging and costly.
Can I live in my buy-to-let property?
If you want to live in your buy-to-let property while still paying the mortgage, you must seek permission from your lender. Buy-to-let terms usually require the property to be rented out, so moving in without consent would breach the contract, potentially triggering the lender’s right to demand full repayment.
If you plan to live in the property long-term, consider switching to a residential mortgage for more protection and potentially lower rates, as these are regulated by the FCA.
Are buy-to-let mortgages regulated?
Buy-to-let mortgages are generally considered investment schemes and business transactions, so they’re not regulated by the Financial Conduct Authority (FCA). In contrast, residential mortgages have strict protections and affordability rules to prevent home loss. Buy-to-let mortgages lack these safeguards, as they’re seen as investments. Professional landlords face fewer regulations, with less stringent affordability tests and limited protections if they fall into arrears.
Exceptions exist: if you rent to a close relative, the mortgage is considered ‘consumer buy-to-let’ and regulated like a residential mortgage. Accidental landlords (those who acquire properties through inheritance or marriage) may also qualify for FCA regulation if they can prove they didn’t intend to become professional landlords.
How many buy-to-let mortgages can I have?
There’s no limit on the number of buy-to-let mortgages you can have, though individual lenders may impose their own caps. Larger banks and building societies typically allow 3–5 buy-to-let mortgages, though they assess risk case by case. Some lenders may have no limit on the number of mortgages but will cap the total borrowing amount across all loans.
Many investors spread their portfolios across multiple lenders, and there’s no legal cap on the total number of mortgages you can hold. However, you'll need to provide details of your existing portfolio when applying for a new loan.
Can I get a buy-to-let mortgage as a limited company?
Many landlords opt to purchase properties through a limited company, particularly those with larger portfolios. This structure can offer tax advantages and improve the efficiency of paying tax on rental income.
As an individual, rental profits are added to your other income (such as salary) and may be subject to income tax. However, as a limited company, you’ll pay Corporation Tax, currently set at 25%. It’s important to calculate which option is more cost-effective for your circumstances.
This information is a guide only and should not be relied on as a recommendation or advice that any particular mortgage is suitable for you. All mortgages are subject to the applicant(s) meeting the eligibility criteria of the specific lender. You should make an appointment to receive mortgage advice which will based on your needs and circumstances.