Buy-to-Let Mortgages

We’ll explain how buy-to-let mortgages work, what eligibility criteria to expect and the pros and cons of becoming a buy-to-let landlord.ㅤ

What is a buy-to-let mortgage?

A buy-to-let mortgage (BTL) is a type of home loan for buying property that you intend to rent out to residential tenants, usually for a profit, or at least to break even. Most buy-to-let mortgages in the UK are interest-only, with the landlord paying the monthly interest using rental income.

Unless you own a property outright, it is usually against your mortgage lender’s rules to rent it out without taking out a mortgage specifically for this purpose..

How they’re different to residential mortgages

The main difference between a buy-to-let and a residential mortgage is the way affordability is assessed. With buy-to-let, it’s all about the strength of the investment, with lenders calculating this based on rental potential (rental yield). The projected rental income has to cover the mortgage payments, calculated at current and possible future interest rates. Most lenders require it to be between 125% and 145% of your mortgage repayments. A local letting agent will be able to share an estimate for the property you have in mind

Affordability for a residential mortgage, meanwhile, is based on the customer’s personal income. While some BTL lenders do factor personal income into their affordability calculations, the deciding factor is usually the potential rental income. Interest rates and deposit requirements can also be higher for buy-to-let mortgages.

The majority of buy-to-let mortgages are not regulated by the Financial Conduct Authority (FCA), unlike their residential counterparts.

Most landlords choose interest-only buy-to-let mortgages to keep their overheads down and for tax-efficiency purposes, but it’s also possible to choose a capital repayment mortgage if you want to reduce your debt each month. This means higher monthly payments, but you’d build equity and own the property outright by the end of the term.

See our guide to buy to let repayment mortgages for more information about these products and how they compare to interest-only BTL mortgages.

Restrictions and rules landlords need to know about

Landlords cannot live in their buy-to-let properties without permission from their lender, and even if they grant it, this would likely mean switching to a different product type. Moreover, 2021 was the first full year where landlords could not deduct mortgage expenses from their rental income. Instead, they’re entitled to a 20% tax credit on interest payments.

Recent buy-to-let regulation changes you should know about include…

• New electrical safety standards were brought in for landlords in the summer of 2020. You can read them in full on the UK Government’s website.
• A new code of practice to help landlords with rent issues came in last year. It is available online in PDF format.
• Leaseholders can now extend their lease by 990 years thanks to new reforms

Did you know… You only have access to one third of the Buy-To-Let mortgages available unless you use a specialist broker!

How much could you borrow?

Mortgage lenders will only approve a loan amount if the forecasted rental income exceeds the mortgage payments by a certain percentage. 125-145% is a common range..

Use the calculator below to find out how much you could borrow

Although there are lenders with no strict cap on the maximum amount you could borrow, affordability assessments are still stringent and you’re unlikely to pass one without a rental income forecast from an ARLA-regulated letting agent.

Moreover, some lenders have minimum personal income requirements and won’t approve you for a buy-to-let mortgage unless you’re earning over a certain amount from other sources, regardless of whether your investment property is likely to be self-funding. Proven earnings of £25,000 is quite a common figure.

Eligibility criteria

Lenders will typically use the following criteria:

Deposit

The typical loan-to-value (LTV) ratio for a buy-to-let mortgage is 75-80%, which means that most BTL lenders will ask you to put down a minimum of 20-25% of the property’s value as a mortgage deposit. That said, a smaller number of providers are known to approve customers with lower deposits of just 15%, under the right circumstances.

As we mentioned earlier, most buy-to-let mortgage lenders base affordability on the projected rental income, but some have minimum personal income requirements, too. Lenders that impose this restriction won’t usually lend to anyone who earns less than £25,000 from other sources.

There are, however, providers who lend to customers with no personal income and base agreements entirely on rental income. 

Proving your income

You will need to provide your buy-to-let mortgage lender with a rental income projection by arranging a report from an ARLA-regulated letting agent. You can find an agent in your local area by carrying out an online search on the official ARLA website.

Some lenders will request three months’ bank statements as proof of your earnings. If you’re a landlord looking to expand your property portfolio, most lenders will ask to see two years of your tax returns plus a copy/copies of your lease agreements as proof of existing rental income.

Credit History

While it’s entirely possible to get a buy-to-let mortgage with some types of bad credit against your name, having adverse credit of any kind could limit the number of approachable lenders and the number of products that you qualify for.

Whether you’re eligible and which lenders will approve you will likely depend on the age, severity and reason for your credit issues. You might also be asked for extra deposit to offset the risk. Customers with clean credit, meanwhile, usually qualify for more favourable rates.

Other requirements

• Age: The number of approachable lenders and products you qualify for will be lower if you’re under 21 or over 75. There are, however, buy-to-let mortgage lenders who specialise in customers over 75.
• Property type: The type of property you’d be renting out will make a difference if it’s not made from bricks and mortar. Anything else might call for a lender who specialises in unique buildings or non-standard construction.
• Landlord experience: Some lenders prefer customers with landlord experience, as evidence of a strong track record with rental properties will give them confidence that your plans are achievable. There are, however, a smaller number of lenders who specialise in first-time landlords.
• Homeownership: Many lenders won’t lend to anyone who doesn’t have their own residential mortgage. Most will want you to have been a homeowner for at least six months, though some might accept less than that, and a handful offer buy-to-let mortgages for first-time buyers, usually with caveats attached.

How to apply for a buy-to-let mortgage

By Making an enquiry with us our free broker-matching service can match you up with the right advisor who specialises in buy-to-let. 

Your buy-to-let broker will then be able to help with the following: 

• Obtaining a rental income projection for the property: This is usually done by instructing a report from an ARLA-registered letting agent – your broker will be able to guide you through this process. If you have personal income, it can help your cause if you provide evidence of this too.
• Download and optimise your credit reports: Once you’ve downloaded your credit reports, your broker will help to identify any inaccurate or outdated information that could hinder your buy-to-let mortgage application.  
• Finding the right mortgage lenders: Your mortgage broker will be able to quickly identify those lenders who specialise in arranging buy-to-let mortgages and currently offer the best rates. Saving you time and, potentially, some money too. They’ll also facilitate a formal application in principle (AIP) to a lender should you opt to take their quote and lender recommendation forward
• Preparing your application: Your broker will already know the documentary evidence required (see next section below) and can help you gather all of this information together to make sure your application has the best chance of approval.

What documents will you need?

You’ll need the following:

• Proof of income (usually the most recent three months payslips)
• Mortgage statement for your existing property or properties
• Proof of rental income (usually a report from an ARLA-regulated agent)
• Proof of deposit (if you have a donor you also need to get this in writing from them)
• Proof of any bonuses or commission (if applicable)
• Proof of ID (passport/driving license)
• Proof of address
• Current or most recent P60
• Your SA302 tax return forms (if you’re self-employed)

How long will your application take?

The average time to receive a buy-to-let mortgage offer is between four and six weeks. Completion would normally follow within another four weeks, assuming there are no setbacks are complications.

More complex applications, such as portfolio mortgage agreements or scenarios where the borrower has bad credit, can take longer, but you can shave time off the application process by applying through a buy-to-let mortgage broker.

They can help you get it done quicker by making sure you find the right lender straight away, assisting you with the paperwork and helping you avoid unnecessary delays.

What interest rates to expect

The rate you pay will vary on several factors, but to give some examples, we’ve illustrated some below:

The rates quoted above were correct at the time of writing and are subject to change at any time at the lender’s discretion. Speaking to a mortgage broker is the best way to keep track of the rates available at any given time.

What are the advantages and disadvantages of a buy-to-let mortgage?

Advantages

• Long-term investment gains: The right buy-to-let property can bring short-term gains in the form of rental income, but the rental property also has the potential to be a sound investment in the long term. This is because property often increases in value, so you might be able to make money through a sale or remortgage down the line.
• The rental market is strong: Although the UK Government has vowed to ‘turn Generation Rent into Generation Buy’, the demand for high-quality rental accommodation remains high and many landlords are capitalising on this, especially in certain UK hotspots.
• Tax benefits: Some of the running costs associated with buy-to-let properties can be reclaimed when you submit your Self-Assessment Tax Return to HMRC each year. These include interest on your mortgage repayments, letting agent fees, repair costs, council tax payments and other bills (if you’re footing them yourself).

Disadvantages

• Tenant-related risks: There will always be risks where tenants are concerned, with the possibility of rental void periods, renters falling into arrears or causing damage to the property among the main concerns. Many landlords opt for comprehensive insurance policies to safeguard themselves against these things.
• Higher stamp duty: On the purchase of the property, stamp duty is charged at a higher rate for buy-to-let properties, with buyers having to fork out an extra 3% compared to residential purchases. This is something to factor into the overall cost if you’re considering other investments.
• Long-term market uncertainty: Although there has traditionally been strong demand for rental properties, the current market turbulence associated with rising interest rates is causing a slowdown.

Other costs and fees

In addition to your standard mortgage and legal fees, there will also be ongoing costs to consider, including landlord insurance, letting agent fees and income tax on your rental earnings.

Broker fees

The amount you will pay depends on the complexity of the buy-to-let mortgage and the type of product you are taking out. Some brokers take their fees from a lender, others anywhere up to 1.5% of the loan amount for arranging the mortgage for you.

Lender application/ booking fees

Every lender deal is different. Some are fee-free and others charge non-refundable upfront fees, of, say £500, for example. This allows them to only take on applications from borrowers who are more committed to proceeding. Generally speaking, fees for a buy-to-let mortgage are higher than they are for residential mortgages.

Valuation fees

This is entirely dependent on the buy-to-let property’s value, type, location, and the BTL product you are taking – some mortgage products offer a free basic valuation report. You will usually pay more for homebuyer or full structural surveys.

Mortgage product fees

These are dependent on the product type & property value. Some lenders will charge you nothing, others a fixed fee of around £500 and others a percentage of the loan amount. For larger buy-to-let mortgages, it might work out most cost-effectively to choose a product that has no fee or a fixed fee.

Mortgage exit fees

If you’re tied into a buy-to-let mortgage and want to leave early, there may be additional costs associated with this, known as Early Repayment Charges (ERCs). These will depend upon the lender.

Solicitor fees & disbursements

Solicitor costs vary depending on their charging structure. Some charge fixed fees, others per hour, and some a percentage of the property (rarer nowadays). Occasionally, lenders will offer free legal advice as an incentive for borrowers to take their particular BTL mortgage deal.

Stamp duty

The rate can vary between 3% and 15% as buy-to-let landlords are liable to pay the surcharge.

Property Maintenance

Can range from nothing to a large amount of money. This depends on the state of your property and any ongoing repairs.

Letting agent fees

These are based on either a fixed fee or a percentage of your rental income. Common charges are 10% of the monthly rent (e.g. £35pm charge on a £350pm rental).

Income tax

This will be from £0-50% (Depending on your current income and rate of tax paid). For more info visit HMRC for help with buy-to-let tax.

Landlord insurance

The cost of landlord insurance can vary dramatically depending on the location of your property, its size, the type of tenants you’re letting to and the type of policy you take out.

Typical policies landlords might need include, contents cover, rental protection insurance, public liability insurance, legal expense cover, malicious damage by tenants and portfolio insurance.

What are rental returns and yields?

A rental return is the difference between the rental income your property generates and the amount of interest due on your mortgage each month, expressed as a percentage. For example, if your mortgage interest payments are £1,000 per month and your rental income is £1,100, the rental return on your buy-to-let property would be 110%.

Rental yields, meanwhile, are the amount of cash your property generates, calculated as a percentage of its value, and broken down into net and gross values. To calculate your rental yield, simply use our calculator below:

Speak to a specialist buy-to-let mortgage broker

Speaking to a buy-to-let mortgage specialist before you apply will boost your chances of finding the right lender, the first time, and that could mean saving time and money. Call 0808 189 2301 or make an enquiry and we’ll set up a free, no-obligation chat with a broker today.