A buy to let mortgage is a type of mortgage you'll need if you are buying a property to let out. It can also sometimes be used to remortgage a property the owner had intended to live in, but has had to move out of and let out. There are significant differences between buy to let mortgages and ordinary residential mortgages, and it's very important to know them before you commit to becoming a landlord.
Like residential mortgages, buy-to-let mortgages come at different rates and terms, so finding the best mortgage deal is still crucial. Read this guide to get acquainted with the rules, before you take the plunge, and use our buy to let mortgage calculator below. And consult our guide to mortgages for first-time buyers for even more info.
What is a buy to let morgage?
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A buy to let mortgage is a specific type of mortgage offered by lenders to investors. In practice, anyone who is buying a property with the intention of collecting rent and not living there is an investor. The most important thing to know about buy to let mortgages is that they are, in the vast majority of cases, interest only. That means that you will only be repaying the monthly interest on the mortgage repayments, not the repayments themselves (your tenants will be doing that by paying rent).
Sounds good so far? It is in the short term, and a buy to let property investment can work very well for someone who has short-term cash flow needs, while growing their savings (for instance, through other forms of investment). Importantly, though, you will have to repay the entire loan you've taken out on the buy-to-let property at the end of the mortgage term. Plus, the interest rates will be higher on a buy-to-let mortgage, regardless of whether it's a fixed term or variable rate mortgage, although they have fallen a little recently.
Buy to let mortgage deposit – how much do I need?
This is another area of crucial difference from residential mortgages: as a buy-to-let mortgage applicant, you'll need at least a 25 per cent deposit, as opposed to the standard 10 per cent. As with other types of mortgage, you'll get access to better deals if you can offer a higher deposit (40 to 50 per cent is the amount that will give you the best deals).
Play around with our online comparison tool to get an idea of what you could borrow and the deals you could get with the deposit you have. We've teamed up with Habito who offer a free, unbiased mortgage comparison service and will answer all your questions. They can also give you unbiased advice about taking out a mortgage, help seeking out the best deals, and can use their insider knowledge to negotiate the best deal based on your financial history and current status, too.
How much can I borrow for a buy to let mortgage?
As part of what lenders call the 'landlord stress testing' process, they will be applying strict financial criteria to your borrowing application. Most importantly, they will apply what is known as the 'interest cover ratio', that is the ratio of rental income to the mortgage payments at the current mortgage rate. What this means in practice is that the lender will want to be satisfied that the property will make a certain amount of surplus above the mortgage repayments, which will need to cover the mortgage interest and other expenses (more on that later). The standard figure used to be 125 per cent at a mortgage interest rate of 5 per cent, so your property would need to generate 25 per cent more rent than the mortgage repayments. Recently, though, many banks have been applying higher figures (as high as 145 per cent in some cases).
Think carefully when choosing a property you intend to let out: will it be attractive enough to potential renters that you'll be able to charge the rent necessary to be approved for the mortgage? Read more advice on how much you can borrow for a mortgage.
Can I take out a buy to let mortgage as a first time buyer?
Yes, although the process will not be any easier than for a residential mortgage. While it's easier to take out a buy to let mortgage on a lower income (£25,000 per annum is usually the threshold), you will need a substantially higher deposit. You will also be forfeiting the stamp duty relief available to first time buyers; although you won't have to pay the three per cent rate usually applied to buy to let buyers, you will have to pay regular stamp duty rates (read our guide for more on that). Moreover, if you then buy a second property, you will have to pay the three per cent rate on it.
Do I need to pay tax on rental income?
Yes. Under the new tax rules, you now need to pay tax on the rental income you receive, minus any expenses, such as property maintenance. It's taxed at the same rate as all other income you receive. The rental income will be added to your other sources of income (be aware of this, as it can mean a change to your tax bracket). You will need to fill out a tax return and record your rental income if it's above £2,500 after all the expenses have been deducted. Different types of rental properties are taxed differently, for example holiday lettings. For more details on rental income tax, see the official government webpage.
Can I switch to a buy to let mortgage?
Yes. There are several reasons you may want to do this, the most common one being the need to move out of the current property without wanting to sell. You cannot just let out your property when you move, though, as that could invalidate your residential mortgage. You'll have to write to your lender explaining your intention and the reasons. Some lenders may allow you to keep your current mortgage and add a 'consent to let' clause in, but many will insist on your remortgaging to a buy-to-let mortgage, with the higher deposit. It may even be necessary to remortgage with a different lender, if the current one is offering rates that are too high.
The decision to remortgage to a buy to let should not be automatic; buy to lets are financially risky, and it may be more beneficial to sell. We explain below what you need to be prepared for. Read more about remortgaging in our guide.
Can I take out more than one buy to let mortgage?
Technically, yes. In practice, if you already own multiple buy to let properties, you become the owner of a portfolio, which you will need to present to the lenders as part of applying for another mortgage. The financial stress testing will be even more rigorous for portfolio holders, and if the lender concludes that you have remortgaged too many times (ie, not been able to pay off your existing loans), or that your other properties have made too much loss, they may not approve another buy to let mortgage application. In other words, your property portfolio will need to be in good health in order to expand it.
Buy to let mortgages: the risks and the importance of savings
The importance of having savings cannot be overestimated for anyone taking out a buy to let mortgage. Becoming a landlord means incurring additional financial responsibility. Almost all landlords experience 'void' periods when the property either stands empty or rent isn't paid; moreover, property maintenance fees can be high, especially in emergency situations (think broken boilers and burst pipes). As a landlord, you'll have to be prepared for these situations, as it is your legal responsibility to maintain the property.
Then there is the loan itself: it is strongly advisable to put aside some of the rental income you receive each month in case house prices fall and the future sale of the property doesn't cover all of the loan you'll need to repay.
Buy to let mortgages: are they still worth it?
Following the changes to law around buy-to-let properties and tax relief, some prospective landlords are wondering whether a buy to let mortgage is still worth their while. We say: if you have the appetite for investing in property and choose your location wisely (i.e. it is attractive to prospective tenants), taking out a buy-to-let mortgage is still very much worth it. After all, if you find a good mortgage deal with a low rate, your costs will be low, while your tenants will be covering the mortgage (and, in most cases, generating you a profit on top of that).
Yes, the tax rules are changing, but you will still be able to offset repairs and refurbishments (though not extensions) against tax. Finally, long-term letting (which is what the buy to let mortgage is for) is definitely not going away, with the number of people renting long term increasing every year. If your property is in good condition and in a rental hotspot, you will likely never be without rental income.
Buy to let mortgage calculator
Getting the best possible mortgage deal is even more important to buy-to-let buyers than residential buyers, given the much higher costs involved. The better the rate, the less for you to pay on a monthly basis, and the more generous the rental income ratio. Use the comparison tool below, developed by mortgage experts Habito, who offer personalsied consultations and will even help you prepare your application.