If you are a landlord looking to add to your property portfolio, or if you are not yet a landlord but hope to become one, buy-to-let mortgages are a great way of investing in property and setting yourself up for additional rental income.
Buy-to-let mortgages are similar in many regards to regular residential mortgages. However, there are a few key differences that it is important to be aware of before you settle on a buy-to-let mortgage deal.
What is a buy-to-let mortgage?
Buy-to-let mortgages are for landlords who want to buy a property with the sole purpose of renting it out. As with residential mortgages, different types of buy-to-let mortgages offer different rates of interest on your repayments.
The general procedures of a buy-to-let mortgage are similar to regular mortgages, but there are some key differences, such as the deposit size and the make-up of the monthly payments.
So let’s start by taking a look at the different types of buy-to-let mortgages that are available.
What types of buy-to-let mortgages are there?
As with regular mortgages, there are different buy-to-let mortgages available that offer different repayment plans and rates of interest.
- Fixed-rate mortgages. These mortgages offer a fixed rate of interest for a period of time that does not follow the Bank of England’s base rate. Fixed-rate mortgages are good for consistency and stability as you know exactly how much you will spend each month. However, if the base rate goes down, you may end up spending more than is necessary.
- Tracker mortgages. Tracker mortgages follow the Bank of England’s base rate. If the base rate rises or if it falls, so too will your interest repayments. The pros and cons of tracker mortgages are clear; your mortgage payments can either go up or down depending on the state of the wider economy.
- Discount mortgages. A discount mortgage has the interest repayments pegged to a certain rate set by the lender known as the Standard Variable Rate (SVR). The difference between a discount mortgage and a fixed-rate mortgage is that your lender can choose to change the SVR at any time.
Many landlords opt for interest-only buy-to-let mortgages, meaning you pay the interest each month but nothing towards the loan itself. Then, when the mortgage term is over, you repay the original loan. The idea is that you have accrued enough money from renting out the property that you can pay back the loan in full.
How much is a deposit for a buy-to-let mortgage?
A mortgage deposit is the amount you initially pay towards the total cost of a property. So if you buy a house worth £200,000 and pay a 10% deposit, you will pay £20,000 and take out a mortgage with interest on the remaining £180,000.
The minimum deposit required for a buy-to-let mortgage is generally a lot higher than it is for a regular one.
The minimum deposit for a buy-to-let is around 15%, but the figure is more likely to be between 25% and 40%.
By comparison, you can get a regular mortgage with as little as a 5% deposit, provided you have the requisite income and working life remaining.
What are the interest rates for buy-to-let mortgages?
Buy-to-let interest rates are usually quite a bit higher than they are with regular mortgages. This is because the property is used as a source of income for the owner.
Interest rates for buy-to-let mortgages are not fixed, and you can find a range of deals from most high street banks and building societies.
As we saw earlier, there are different types of buy-to-let mortgages you can get that offer different models of repayment. If you opt for a tracker mortgage, you will pay interest at the current Bank of England base rate. As of August 2022, the base rate is 1.75%.
Who is eligible for a buy-to-let mortgage?
Mortgage lenders only offer mortgages to borrowers who fulfil certain criteria as they have to be sure they can pay the mortgage back. The criteria are even more stringent for buy-to-let mortgages as the interest repayments are higher.
To qualify for a buy-to-let mortgage, you will usually need to:
- Be over the age of 21.
- Be under the age limit of the lender you have selected. Different lenders have different upper age limits, but they have to be sure that you will be able to pay off the mortgage during your lifetime.
- Have an income of more than £25,000 per year.
- Have a cash deposit that meets the minimum requirements of the mortgage provider you borrow from.
- Have a clean credit history.
How much can you borrow for a buy-to-let mortgage?
The predicted rental income of a property determines the amount you can borrow for a buy-to-let mortgage.
Every lender varies, but the total rental income within the mortgage period normally needs to be around 25% to 30% more than the total mortgage payment.
Where can you get buy-to-let mortgages?
You can get buy-to-let mortgages with most major high street banks and building societies.
Before taking out a buy-to-let mortgage, it is a good idea to discuss your plans with a mortgage broker beforehand to ensure you find exactly the best deal for you.
What fees do you need to pay on a buy-to-let mortgage?
When you buy any property, whether it is to let out or to live in, there are additional fees to remember and interest repayments that you need to factor into your budget.
The fees for a buy-to-let property include:
- Building insurance: Buildings insurance is not a legal obligation, but mortgage lenders will only offer mortgages if a policy is bought as it protects the building against structural damage.
- Landlord insurance: Again, you are not legally obliged to get landlord insurance, but it is a good idea as it protects you against late payments and rental defaults by your tenants.
- Stamp duty: This is a tax paid on the purchase of any property.
- Tax on rental income: Rental income is included in Income Tax, so be sure to factor that in when it comes to working out your monthly mortgage repayments.
- Mortgage lender’s fees: Every mortgage lender will charge an initial fee for their services, so check what they are before settling a deal.
- Letting agent’s fees: If you choose to have a letting agent find your tenants, you will have to pay them a fee as well.
Things to be wary of when you get a buy-to-let mortgage
Many people choose to become landlords for the simple fact that income from a rented property is a great addition to your monthly pay packet.
However, there are several things that can go wrong when you rent out a property. For example:
- There may be significant periods with no tenants. There is no guarantee that people will always want to live in your property. So you need to be financially ready for times when your rental property is empty.
- Tenants may not pay the rent. This can and does happen frequently, so it is recommended that all landlords get landlord insurance.
- The sale of the property may not cover the mortgage. This is known as negative equity when the property sells for less than the mortgage repayment.
- You need to pay Income Tax. Any income you get from your rented property needs to be declared. You can do this by filling out a self-assessment tax return.
How to find good deals on buy-to-let mortgages
With so many mortgage lenders to choose from, how do you go about finding the best deals for a buy-to-let mortgage?
Here, we will take you through some tips on what to consider and look out for before settling on a deal.
What type of mortgage do you want?
Knowing the type of mortgage you want means that you can approach and compare every lender with a specific package in mind.
There are pros and cons to every type of mortgage, but it can also be a good idea to speak to a financial adviser beforehand as they can give you a general idea of the state of the property market and the wider economy, all of which influences things such as the base rate and SVRs.
Check the fees
There are often additional fees attached to a mortgage. Different lenders will have different fees, so do your research and find out the fees charged by each of the lenders you approach.
Monitor your credit rating
Your credit rating plays a significant role in the mortgage you are offered. So check your credit rating and take steps to improve it if it is poor.
Shop around
Keep your options open and shop around for good deals from various lenders. You can either do this through your own research or by using a price comparison site.
Summary
Buy-to-let mortgages are mortgages specifically for landlords who want to buy a property with the sole intention of renting it out to tenants rather than living in it themselves. As with residential mortgages, there are three main types of buy-to-let mortgages: fixed-rate, tracker, and discount. However, unlike residential mortgages, most landlords choose to make interest-only repayments each month, and the initial deposit is much higher.
Buy-to-let mortgages are a great way of investing in property, developing your portfolio, and creating an additional source of income from rental payments. Be sure to follow our tips to make sure you find the best mortgage deal out there for you.
