Buy-To-Let Mortgages

If you’re buying a property to rent out, you’ll need a buy-to-let mortgage. These differ from conventional mortgages you use to buy your own home, so we’re here to help you understand how they work.

buy to let mortgage

What is a buy-to-let mortgage?

A buy-to-let mortgage works differently to a residential mortgage on a property you’re planning to live in. You could need a bigger deposit, face potentially higher fees and you could pay a higher rate of interest.

Are Buy-To-Let Mortgages like a normal repayment mortgage?

Buy-to-let mortgages can be repaid via a capital repayment method, but they are usually offered on an interest-only basis, which means the capital debt – the amount you borrowed as a mortgage – will not be cleared at the end of the term.  Invariably, you will require a ‘repayment’ vehicle – a method in which to pay the mortgage amount off, such as savings, investment or sale of the property. Most residential mortgages are capital repayment, where your monthly payments cover the interest and a portion of the debt, and the value of the loan plus interest is gradually paid back over the deal period.

What are the downsides of a buy-to-let investment?

Landlords with a buy-to-let mortgage usually expect their monthly mortgage payments to be covered by the rent they receive. But some months there may be problems with rent collection and other months there might not be any tenants living in the house and paying rent.  

Why do buy-to-let borrowers have higher costs than a normal mortgage borrower?

That’s because a buy-to-let mortgage is then seen as a higher risk from the lender’s point of view and a buy-to-let borrower then has to pay higher costs.

What is the average Buy-to-let mortgage loan size?

All mortgages have a loan-to-value – LTV – figure, which is the size of the mortgage as a percentage of the value of the property. With a normal residential mortgage, the LTV can be up to 100% – but a LTV of 90% or 95% is more common – and then the difference between the LTV and the asking price of the property and the total loan is made up of your deposit. So the deposit size could be as little as 5%. But with a buy-to-let mortgage deal, most lenders will say you’ll need at least a 25% deposit to get a mortgage. This means the difference they loan you is less, so your LTV is less, and it protects the lender in case you default on your mortgage repayments because of problems with collecting rent.

What’s the advantage of a larger deposit on a buy-to-let mortgage?

The greater the deposit you can put towards the purchase, the lower your monthly mortgage repayments are likely to be.

Although the average loan-to-value ratio is lower for a buy-to-let purchase than a residential mortgage, you’ll need to factor in the larger capital cost at the end of the mortgage to pay off the value of the house. 

What do you need to do at the end of your interest-only mortgage deal?

You’ll still have to pay off the cost of the property purchase price at the end of the deal, as you’ll only have been paying back the interest. You might decide to do this by selling the property.

If you decide to sell the property then house prices would need to have risen, or they’d at least need to be the same for you to be able to pay back what you owe towards the property value. If house prices have fallen when the time comes to sell, you’ll still need to make up the loss on the price you paid for it. 

What fees can I expect as a Landlord?

If you are planning on buying a property to let out, there will be other fees that you’ll need to factor into your budgeting when deciding whether or not you can afford a mortgage.

You’ll need to pay tax on your rental income, as well as paying for landlord fees like landlord’s insurance, rent insurance, letting agent fees – if you choose to use them – and more.

How many buy to let mortgages can you have?

Many of the mainstream buy to let lenders set a limit of around three to five mortgaged properties (or maximum borrowing amount with them, i.e. £1m). Some lenders even set limits on the number of buy to let mortgages you can have with other lenders.

Can I get a buy to let mortgage with no income?

No, it’s highly unlikely you’ll find a lender willing to do that. That’s because lenders don’t like risk. They want to know that you have the ability to cover the mortgage repayments, even if they won’t take that money into account when deciding how much to lend you.

Is it illegal to rent out a house without a buy to let mortgage?

If it is a residential mortgage that is on the property and it is being let out, then this is most probably in breach of your mortgage terms and conditions and be classed as mortgage fraud.  

It is legal to rent a property with no buy-to-let mortgage only if you own the property outright already or are a cash purchaser.  This is because lenders assess a buy-to-let mortgage as a greater risk, simply because that the property will be rented out rather than being owner-occupied.

Are all buy to let mortgages interest only?

Not always. Most buy-to-let mortgages are interest-only loans and therefore the monthly repayments can be cheaper than a repayment mortgage. However, you’re likely to need a deposit of at least 15% before you’re able to borrow and overall fees tend to be higher.

Is there an age limit for buy to let mortgages?

There can be age limits for applicants, as well as a maximum age at the end of the mortgage term – each lender is different and will decide their own limits – if any at all.  There are certainly lenders that will lend into retirement, as the affordability is usually based on the rental income vs the mortgage repayment, rather than personal income. 

Can you rent a buy to let property to a family member?

If you’re seeking a buy-to-let mortgage for your investment property, the lender is likely to require you to charge rent at 125% or higher than the monthly mortgage costs, so it may not be possible for you to give your friends or family a discount or let them live in the property for free.  However, it is perfectly acceptable to let out to a family member, as long as the lender allows it. They would normally then just assess affordability for it on your own income as well as expenditure for both properties, so you’ll need to have enough disposable income to warrant running a second house if required.  Our advisers can give you the right mortgage advice for situations like this.  

Are buy to let mortgages regulated?

Are buy to let mortgages regulated? As a commercial (not consumer) transaction buy to let mortgages are not regulated by the Financial Conduct Authority; however, from 21 March 2016 this changed for any transaction classed as Consumer Buy to Let.

Can I rent out a property with a residential mortgage?

Some lenders will allow you to stay on your current residential mortgage deal for as long as it lasts (although they may increase your rate if you rent out your home for more than a few months).  If you already live in the property and are moving, you can request a ‘Consent to Let’ from your residential mortgage provider – where they give you permission to rent out the property. You shouldn’t, however, ever get a residential mortgage on a property that you know will be rented out. 

Can I get a buy to let mortgage and live in the property myself?

Mortgage regulation works both ways, so if you are to be living in the property yourself, then you should arrange a residential mortgage and not a buy-to-let.

By | 2019-08-21T12:40:08+01:00 July 25th, 2019|