Updated 16 April 2021
Purchasing a property with a buy-to-let mortgage means you're suddenly a landlord with the double benefit of having a regular rental income and an investment for the future. However, there are quite a few things to consider before you decide if property investment is the right route for you.
If you buy a property to rent out, you won't be able to fund it with a traditional residential mortgage. Instead, you'll need a specialist buy-to-let mortgage. This type of mortgage has been designed specifically for people who buy a property to rent to tenants rather than a place to live and should be viewed as a mid to long-term investment.
The rules around buy-to-let mortgages are fairly similar to those around regular mortgages, but there are some key differences to be aware of around lending criteria, eligibility and affordability.
You can get various types of buy-to-let mortgages, such as a fixed, variable, tracker, discount or capped interest rate. However, most buy-to-let mortgages are interest-only.
Monthly payments are generally cheaper than with a repayment mortgage. In the short term, this can help minimise your monthly outgoings. However, once your deal ends, you'll have to pay off the cost of the property at the time you bought it. Most landlords do this by selling on at a profit – but it might not be that simple. If house prices fall and the property is worth less than what you paid for it, you'll have to use your own money to pay off the remaining debt. That's why it's essential to have a long-term plan to pay off the loan or refinance it at the end of your mortgage term.
With a repayment mortgage, you'll pay off the full amount you borrowed by the end of the term, so you can then:
A repayment mortgage costs more per month, so it may only be suitable if you're able to charge enough rent to cover it.
The minimum deposit for a buy-to-let mortgage can vary. It's usually 25% of the property's value, although it could be between 20-40%. So, for a property that's £250,000, you'll be expected to put down anywhere between £50,000 (20%), £62,500 (25%) and £100,000 (40%).
The maximum you can borrow depends on the amount of rental income you expect to get. So, to get an idea of how much rent you can charge, speak to local letting agents to see how much similar properties are being rented out for.
Money Facts has a buy-to-let calculator that works out expected rental yield so you can see what return you might get before you apply for a buy-to-let mortgage. For example, if the property is valued at £175,000 and you're able to charge a monthly rent of £895, your expected yield would be a healthy 6.14%.
Lenders will look at how much rental income you'll get from the property and compare this to your monthly mortgage repayments. The rental income will usually need to be at least 125% of your mortgage repayment. So, if your monthly interest payments are £600, you'll need to charge at least £750 a month in rent. Generally, the more you're able to charge in rent, the higher the loan you could be eligible for.
There are various rules regarding lending criteria that you'll need to become familiar with, including:
For first time buyers who are priced out of the market in their local area, buying a property elsewhere and renting it out could be a way to get onto the property market. You can use the Unbiased mortgage calculator to find out how much you could borrow and how much it might cost a month. Things to be aware of include:
If you're buying a property to be used exclusively as your own holiday home, then you'll need a residential second home mortgage. However, if you plan to let it out to generate income, you'll need a special holiday let mortgage. Either way, a mortgage broker can improve your chances of finding the right deal.
It's usually cheaper to get a residential mortgage than a buy-to-let one – interest rates are typically lower, and so are the product fees because lenders see buy-to-let properties as higher risk.
In addition to paying a larger deposit, the arrangement fees can be as high as 3.5% of the property's value. On a property valued at £225,000, that would be a sizeable £7,875.
You'll also have to pay more stamp duty for a second property that is not your main home.
Most of the big banks and some specialist lenders offer buy-to-let mortgages, so it's worth hunting down the best mortgage deals – such as two or five-year fixed rate cashback mortgages.
As with residential mortgages, the bigger the deposit you put down – usually 40% or more – the better the rate you'll be able to secure.
Arrangement fees tend to be higher too, so when comparing deals, evaluate the overall cost of the loan, as a cheaper initial rate can sometimes be outweighed by high-cost fees. It can really pay to speak to a mortgage adviser to help you secure the best mortgage deal.
What kind of tax reliefs can landlords get, and is buy-to-let still worth it?
Changes to mortgage interest relief, tax laws and a surcharge on stamp duty for second homes has resulted in many landlords' profits taking a hit.
In terms of mortgage interest tax relief, previously, landlords were able to deduct the interest they paid on their mortgage before paying tax, effectively giving higher-rate taxpayers 40% tax relief on their mortgage payments. Now, landlords have a flat-rate tax credit based on 20% of their mortgage interest.
And, while this won't negatively affect landlords who are basic-rate taxpayers, it will impact those who are higher or top-rate taxpayers.
Before you start, decide if buy-to-let is right for you. There are also tax implications, so it's worth talking to an accountant. While bricks and mortar are generally considered a pretty safe bet, remember that a buy-to-let property is an investment – you could make money, but you could lose it too. You also have to consider if you're comfortable with the responsibility of being a landlord.
1. Choose a property that's within your budget, desirable to renters and likely to make you a profit.
2. Research what buy-to-let mortgages are available. Speak to a mortgage adviser to help you find the best deal.
3. Speak to a lender to see if they can set up an agreement in principle (AIP) or mortgage in principle (MIP). An AIP or MIP will let you know approximately how much you can borrow.
4. Once you've found a suitable property and had your offer accepted, you can begin the full mortgage application and advise your solicitor to carry out all the appropriate searches, surveys and contracts. If you are remortgaging a buy-to-let property, your solicitor will liaise with your current lender to move your mortgage to your new lender.
One of the most common reasons for a buy-to-let remortgage is to purchase an additional property and to use the equity from the first as the deposit on the second.
You could opt for a full remortgage, paying off the original buy-to-let and replacing it with another, or look at a second charge (which allows you to use any equity you have in a property as security against another loan) on the property. If you own four or more properties, consider a portfolio mortgage that covers them all with one overall loan.
If you own multiple properties, you could choose to remortgage them all onto a multiple portfolio product, which may enable you to secure a better deal. Your mortgage adviser will be able to give you more details.
When you become a landlord, you need to have specialist insurance because buy-to-let properties aren't covered by normal home insurance. These policies cover the same general risks (fire, flooding and subsidence) but also protect you against damage caused by tenants, unexpected legal costs, emergency repairs, loss of rental income, as well as your liability if tenants make a claim against you. If you own more than one buy-to-let property, you may be able to get one policy to cover them all, which can be easier to manage.
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