Buy-To-Let Mortgages: A Complete Guide

If you’re looking to earn rental income in the UK, getting a buy-to-let mortgage is among the best ways to do so as it means you don’t need to purchase a property outright. 

This type of mortgage has been specially designed for people willing to invest in properties to rent them out.

That is why it is a bit different from other mortgages, such as those available for residential properties. But before you get such a mortgage, there are many things you need to understand.

This in-depth guide strives to explain everything you should know about buy-to-let mortgages so you can decide whether getting one is a worthwhile investment.

It also explains how to get such a mortgage and what its advantages are, so make sure to read until the end.  

Buy-To-Let Mortgages Guide

A buy-to-let mortgage is a mortgage that is available for people who intend to purchase property for the purpose of renting it out to others.

The amount of money you can borrow for this purpose will primarily depend on the rental income earned from the property, among other factors.

These types of mortgages have been popular in the UK since 1996, and different types of buy-to-let mortgages are available for different purposes.

The most common among these is a buy-to-let interest-only mortgage, with the interest rates being variable or fixed.

A variable rate mortgage means that the amount of interest to be paid can fluctuate depending on what the rate has been based on – for example, the Bank of England base rate or a discount from the lender’s standard variable rate.

In contrast, a fixed rate option means the amount will not change. One key factor that separates buy-to-let mortgages from other types is that they typically require a higher deposit amount.

While buy-to-let properties are mostly residential, they can include hotel rooms and student property investments.

It is also important to keep in mind that the interest rates and mortgage fees on such mortgages tend to be higher than for residential or owner-occupied mortgages. 

Requirements For Getting A Buy-To-Let Mortgage  

Qualifying for a buy-to-let mortgage is generally more difficult than for other types of mortgages.

Here are the standard requirements you need to meet before becoming eligible for such a mortgage.

1. A Good Credit Record and Rating

As in the case of almost all mortgages, you need to have a good credit rating and should not already have a huge amount of borrowings to be repaid.

For instance, if you need to pay a large amount borrowed through credit cards, getting a buy-to-let mortgage might be difficult.

Options are available for those who have an impaired credit rating, however typically rates and fees will be higher. 

2. Evidence Of Income Or Earnings

Before you can get a buy-to-let mortgage, you will need to provide evidence of earnings other than rental income. The minimum amount a borrower needs to be earning is generally over £25,000.

Being unable to provide such evidence will mean most lenders will be unwilling to approve a buy-to-let mortgage.

3. Maximum Age Limit   

Lenders usually set a maximum age limit for people seeking a buy-to-let mortgage; in most cases, this limit is 75 years of age. However, in some instances, you may find lenders that have lower maximum age requirements.

4. Loan-To-Value Ratio    

The Loan-To-Value ratio (LTV) helps lenders know the amount of risk they are taking on when offering a mortgage.

In the case of a mortgage, it is calculated by dividing the mortgage amount by the value of the property.

You should have an LTV ratio limit of at least 75% for buy-to-let mortgages in most cases. Read more about 80% LTV and 90% LTV buy-to-let mortgages.

5. Rental Income Amount   

Since the amount of money you can borrow under a buy-to-let mortgage depends on the expected rental income, this income should cover at least 125% of the repayments, certain situations will require the rental income coverage to be more than this.  

6. Having Your Own Home

This requirement may not be present in all cases, but often lenders require you to have your own home, even if it is with an outstanding mortgage. This reduces the chance of the investor owner occupying the rental property in the lender’s eyes.

How Do Buy-To-Let Mortgages Work?

While buy-to-let mortgages are somewhat similar to other types of mortgages, there are a few differences.

For instance, both the interest and fees are higher, and you need to deposit at least 25% of the value of the property usually. However, this amount can vary between 20% and 40%, depending on the lender.

The reason for the higher fees and interest rates is that rental income is not always guaranteed; there may be a delay in getting rent from tenants, or the property may be vacant. This means that the risk involved is higher, which is why buy-to-let mortgages are costlier.  

Also, as mentioned earlier, most buy-to-let mortgages are provided as interest-only loans, meaning that you only need to pay the interest on the mortgage each month. The principal loan amount has to be repaid at the end of the mortgage term.

In a few cases, buy-to-let mortgage providers may allow repaying the principal amount in instalments each month or through an overpayment allowance over an annual period.

Having to pay the interest on the mortgage may reduce your financial burden in the short term. But you must have a plan for repaying the full mortgage amount in the long term, which can be done by using savings or selling the property.

Also, remember that stamp duty has to be paid on properties worth more than £40,000 if they are not used for residential purposes.  

Another major difference between a buy-to-let mortgage and other mortgages is that the Financial Conduct Authority (FCA) does not regulate the former.

However, in some instances, there can be exceptions, such as when the property is to be let out to a family member, like a parent, sibling, or spouse.

These are known as consumer buy-to-let mortgages and are treated by the FCA in the same manner as residential mortgages. 

Consumer buy to let mortgages are for landlords who are treated as ‘accidental landlords’ they do have FCA protection, unregulated buy to let lenders will not be able to offer these types of mortgages.  

How Much Can You Borrow Under A Buy-To-Let Mortgage?

The amount of rental income expected from the property to be let out is the primary factor that determines how much you can borrow with a buy-to-let mortgage.

Before lenders are willing to provide a loan, they want to ensure that the rental income will be sufficient to cover the mortgage payments and other expenses. 

This means the rental income should be at least 25% to 30% higher than the mortgage payment (potentially higher).

If this condition is not met, it can impact the LTV, and the lender may require a bigger deposit to cover the higher risk. 

The property will receive rental income from the tenants. To get an idea about your rental income, you can check online rental listings and consult local letting agents.  

How To Get A Buy-To-Let Mortgage? 

Apart from specialist lenders, most large banks in the UK offer buy-to-let mortgages.

But it is a good idea to consult a mortgage adviser before taking out a buy-to-let mortgage, as they can help find the best mortgage deals available. 

When comparing various buy-to-let mortgages, one of the most important factors is the total loan cost.

In many cases, the mortgage may be available at a low cost but may have high fees, of course increasing the overall price of the mortgage product within the initial period you have selected, be that fixed or variable. 

Speaking of the fees, you may expect to pay around £1,999 for a buy-to-let mortgage since the fees for such mortgages are much higher compared to residential mortgages in most cases.

Also, remember that some lenders may charge fixed fees, and others may charge fees on a percentage basis on the mortgage amount.     

Always pay attention to the various charges and fees besides the headline rates since those can provide a good idea about the suitability of the mortgage. 

How Many Buy-To-Let Mortgages Can I Have? 

There is no standard limit on the number of buy-to-let mortgages that can be taken out, and it will generally depend on the mortgage provider and your financial condition.

In some cases, lenders may only allow a single or, at the most, two such mortgages for an individual, while in others, you may be able to get several mortgages. That is why an experienced mortgage broker is imperative. 

However, for that, you will need to ensure that you have the rental income and can deposit the required amount for the mortgages.

Lenders generally classify a person that holds four or more buy-to-let mortgages as a ‘portfolio landlord’. 

Learn everything you need to know about how many buy-to-let mortgages you can have in this article.

Buy-To-Let Mortgages And Tax

Disclaimer: When it comes to taxes, this is just general advice and not to be relied upon as fact. When it comes to tax everyone’s position and circumstances are different and the rules are changing all the time. Only by seeking advice of a qualified tax professional can you be certain you are complying with all the relevant tax rules & regulations.

1. Capital Gains Tax

An 18% capital gains tax (CGT) is charged for basic taxpayers on buy-to-let second properties, while the rate is 28% for those paying taxes at higher or additional rates.

For taxpayers with other assets, the basic CGT rate is 10%, while it is 20% for higher taxpayers. 

Additionally, you will need to pay CGT when selling the property if your profit is more than £6,000.

The CGT can be reduced by deducting costs such as a loss on the sale of a buy-to-let property, estate agent, solicitor fees, and stamp duty. 

Taxes are to be paid within 30 days, and all profits from selling such properties should be declared to HMRC. Additionally, you cannot carry any CGT allowance back or forward; it must be used in the same tax year.

Related: Capital Gains Tax on Buy-To-Let Properties (Complete Guide)

2. Income Tax    

Income received from buy-to-let properties is taxable income and has to be declared on the tax returns filed for the respective year.

The rate for this tax maybe 45%, 40%, or 20% in different regions, such as Northern Ireland, Wales, and England. In Scotland, the rates may be 47%, 42%, 21%, 20%, or 19%. 

Again, the rental income can be offset by deducting costs costs like property maintenance, and agent fees. Borrowers need to pay this tax if their annual income is greater than their personal allowance.

3. Mortgage Interest Tax Relief

Earlier, it was possible for landlords to deduct mortgage interest from rental income to reduce the amount of tax to be paid. But this is no longer the case, and the amount of tax to be paid now is greater. 

Advantages Of Buy-To-Let Mortgages

1. Cover Mortgage Payments And Generate Income

Depending on the cost of monthly mortgage payments and the rent charged, buy-to-let mortgage properties can often pay for themselves. Additionally, in most cases, they are an easy way to earn income. 

2. Long-Term Investment And Profit

Like most properties, buy-to-let mortgages can be long-term investments, and their value can increase with time. That being said, there is no guarantee in this case, as prices can fluctuate.

3. Offset Costs Against Taxes

A portion of the repair and maintenance costs of running such rental properties can be recovered when filing tax returns.

Also Read: Changing Mortgage To Buy To Let (Should You Do It?)

Disadvantages of Buy-To-Let Mortgages

1. Stamp Duty Surcharge

You will usually need to pay a 3% stamp duty surcharge on buy-to-let property purchases.

2. Property Can Become Vacant 

Like other rental properties, buy-to-let ones can sometimes become vacant, meaning there is no income from them. However, you will still need to pay maintenance costs and taxes on such properties. 

Also, in most cases, you can’t legally live in your buy-to-let property, as we’ve covered here.

3. Property Damage Coverage

Any damage to the property and other repairs will have to be covered by you. 

Final Words

Buy-to-let mortgages offer a way of earning income by renting out properties, which can also be great long-term investments.

If you are financially stable and are looking to increase your income through rental properties, this is an excellent way to achieve that objective.

However, since the fees and interest are higher than for residential mortgages, a buy-to-let mortgage is not the best option for everyone.

First-time buyers may find it difficult to get such a mortgage as lenders will require a larger deposit from them. 

That is why proper research is necessary before taking out such a mortgage, or you can find alternative options that may be more suitable for your requirements. 

**A buy to let mortgage will be secured against your property.

Some types of buy to let mortgages are not regulated by the Financial Conduct Authority.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.