What is a Buy-to-Let Mortgage?
Sometimes referred to as a Residential Investment Mortgage, Buy-to-Let Mortgages are for those who are investing in property with the intention of renting it out.
What’s the Difference Between Buy-to-Let and Standard Owner Occupier Mortgages?
- Buy to let mortgages usually have a higher deposit requirement, which is typically at least 25% of the purchase price.
- The amount you can borrow for a buy to let mortgage is tied to the rental income return that the property can generate, so lenders will require you to allow for a clear surplus
- Some lenders will look at other factors aside from the rental income.
- Unlike a standard mortgage, the investment property can be owned in many ways, such as through a company.
- Such ownership decisions have a direct impact on income tax, Capital Gains and Stamp Duty liabilities.
Can I Get a Standard Residential Mortgage Instead?
No, you can’t get a standard residential mortgage if you want to rent out the property. Residential mortgages are for people who intend to live in the property and not rent out rooms to tenants. Mortgage lenders believe there is a higher risk involved with buy-to-let mortgages because your property could be unoccupied for long periods, or you might experience problems with tenants not paying their rent.
If you take out a residential mortgage and then rent out your flat or house, you could face raised rates or extra charges. Your lender may even decide to repossess your property or demand you pay off the mortgage in full immediately. You cannot let out a residential property without the lender’s consent, and you would be committing mortgage fraud by getting a residential mortgage with the intention of renting out your property.
What are my Buy-to-Let Mortgage Deal Options?
There are various types of loans available if you want to purchase a buy-to-let property, such as:
- Fixed-rate mortgage: Your monthly interest payments stay the same, which means you will always know how much you need to pay each month. This is also good news for your tenants because you won’t have to increase their rent. Whilst there are advantages to not being affected by a rate change, you won’t benefit when interest rates fall.
- Tracker mortgage: Your monthly interest rate can fluctuate because it’s based on the Bank of England’s base rate, plus a percentage above this rate. So, if the Bank of England raises or lowers its rates, your mortgage repayments could go up or down.
- Standard variable mortgage: Your lender will decide on the rate when you take out a standard variable rate (SVR) mortgage, and they can change the rate whenever they please. But if you decide not to stay on an SVR mortgage, you have the freedom to move onto a better deal at any time.
- Discount variable mortgage: Has a set discount off the lenders standard variable rate (SVR), but the amount you pay can still change from one month to the next. You also need to be aware that the discounted rate only lasts for a set period, meaning your lender will switch you onto its SVR when your discounted period ends and increase your monthly repayments.
Each mortgage has its advantages and disadvantages, and the right type for you will depend on your circumstances.
Should I Get an Interest-Only or Repayment Buy-to-Let Mortgage?
Interest-Only Mortgage
- Monthly payments are lower
- Payments only cover the interest owed.
- Must repay the entire loan when your mortgage term comes to an end.
- You can pay off the loan using savings, or you may decide to remortgage or sell the property.
Repayment mortgage
- You must pay off the amount you borrowed by the end of the term
- Pay back both the interest and some of the loan every month.
- You will own the property when your mortgage ends.
- Pay less overall in interest charges.
- A repayment mortgage could be a good option if you can charge enough rent to cover the monthly mortgage payments.
Are Buy-to-Let Mortgages More Expensive?
They can be. Overall fees tend to be higher, and you generally need to pay a deposit of at least 25% of the total property value for a buy-to-let mortgage because lenders believe they take on more risk. Buy-to-let mortgages can typically be around 1% more expensive than residential mortgages, and the arrangement fees, interest rates and stamp duty rates can sometimes be higher as well.
How Much Can I Borrow?
The amount you will be allowed to borrow will depend on several factors, including your borrowing history, your current financial circumstances, the size of your deposit and your expected rental income. Most lenders will require the rental income to cover around 125% of the mortgage payment, but some prefer it to be as high as 145%.
You can get a better idea of how much rent you can charge tenants by researching similar properties online or talking to a local letting agent. Once you know the rental value, you can then figure out how much you need to borrow.
What Other Fees Should I Factor into my Budget?
The typical fees you can expect to pay are the same as the costs associated with buying a home for yourself, but there are several other costs you need to know about if you want to become a buy-to-let landlord.
Costs associated with a buy-to-let property include:
- Property survey fees
- Stamp duty
- Legal and accountant fees
- Income tax – on rental income
- Letting agency fees – only if you choose to use one
- Buildings insurance
- Repairs and maintenance
- Annual gas and electrical safety certificates
- Annual energy performance certificates
- Other fire and safety measures
- Capital gains tax – should you decide to sell your property
If you’re serious about becoming a landlord, it’s important to consider all of the additional costs you might incur before applying for a buy-to-let mortgage.
Additional Costs:
- Running repairs
- Rental voids
- Utility costs
- Annual checks and certificates
Things to Consider when Thinking about a Buy-to-Let Mortgage
- if you’re a borrower who has already occupied the property, or has inherited, talk to our team about a particular funding solution called, Consumer Buy, which is recognised by the Financial Conduct Authority.
Provide can go over all of your options with you when it comes to borrowing and buy-to-let mortgages. Our team of financial experts is experienced in putting together financial planning documents and preparing the additional criteria necessary for a buy-to-let mortgage application.