When talking about buying a property, the first thought that comes to everyone’s mind is regarding mortgage payments.
It doesn’t matter what type of property you wish to buy – you will typically need a mortgage to purchase the property.
That said, the mortgage payment methods might differ slightly between different types of properties.
In that context, one of the most common questions we get is about the differences between buy-to-let vs residential mortgages. These are the two most common types of property owned by UK citizens.
So, to address the above question, we have prepared this comparative guide. In this article, we have discussed how buy-to-let mortgages differ from residential mortgages in greater detail.
Here’s a quick comparison between buy to let vs residential mortgages:
| Feature | Buy-to-Let Mortgage | Residential Mortgage |
|---|---|---|
| Property Purpose | Investment property | Primary residence |
| Property Usage | Rented to tenants | Used for living in |
| Mortgage Eligibility | Based on rental income | Based on income and credit |
| Interest Rates | Usually higher | Typically lower |
| Minimum Down Payment | Often higher | May have lower options |
| Rental Income Requirement | May be necessary | Not typically required |
| Loan to Value (LTV) Ratio | May be lower | May allow higher LTV |
Now that you’ve a basic idea let’s take a detailed look at both the types of mortgages and the differences between them.
Table of Contents
What Is A Residential Mortgage?
As you can guess from the name, a residential mortgage is a type of mortgage that is used for purchasing residential properties. Such a property is purchased by the buyer for the sole purpose of living in it.
Naturally, it is not commercial in nature, meaning that the owner won’t be generating any revenues from it. So, it is essentially meant to be used as a home for the buyer and their family, if they have one.
However, if the owner decides to let a part or the entirety of the property to someone else, then it could be considered a buy-to-let property. In that case, the mortgage rules will be slightly different.
What Is A Buy-To-Let Mortgage?
Now, let’s take a look at what buy-to-let mortgages are. Simply put, a buy-to-let mortgage is a type of mortgage that is used for purchasing a property that is intended to be used for commercial purposes.
When we say commercial purpose, we are actually referring to the act of giving out the property for rent.
In other words, if you do not intend to use the new property as your personal residence, then a Buy-to-Let Mortgage is more than likely going to be the option to take. Such buy-to-let properties are purchased for the sole reason of renting them out to third parties.
Buy-to-let properties are generally bought by landlords who wish to use them as long-term investments.
When a buy-to-let property is rented out, it generates income for the landlord, and they are liable to pay taxes on this income, just like any other type of business.
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.
Buy-To-Let Vs Residential Mortgage: What’s The Difference?
Besides the variations in the general usage of these two types of properties, are some other noticeable differences between regular residential mortgages and buy-to-let mortgages.
These differences have been discussed in greater detail here.
1. Mortgage Deposits
The mortgage deposit is the money that you need to pay upfront for the new property.
Be advised that this is just a portion of the total amount that is needed to purchase the property. The rest of the money is collected through monthly mortgage payments.
On that note, the mortgage deposit amount you need to pay for a buy-to-let property is significantly higher than that for a residential property.
In most cases, mortgage providers will require you to pay at least 25% of the property’s total amount as a deposit. Whereas in the case of residential properties, the minimum amount of deposit that you need to pay could be as low as 5%.
There is a reason behind such a difference in the payable deposit amount. Most mortgage providers consider buy-to-let properties to be riskier than residential properties. That’s because the financial revenue stream of the landlord depends on the rent paid by the tenants.
If the latter is unable to pay rent on time, or they don’t pay at all, then the landlord could fall behind on payments if they do not have suitable funds to pay the mortgage without the rental income being received.
On the other hand, such a risk is considerably less for residential properties since they are meant for personal use. Because of this reason, the deposit amount that needs to be paid to mortgage providers is noticeably less.
2. Mortgage Type
The two main types of mortgage payments used when purchasing a new property are repayment and interest-only mortgages.
The former is the preferred mortgage type in the case of residential properties, while the latter is commonly used for buy-to-let properties.
A repayment mortgage is an option where the buyer is expected to pay both the loan amount and the interest amount while making the monthly payments. As such, your whole debt will be cleared once you make the final payment.
In contrast, an interest-only mortgage requires you to pay only the interest amount on a monthly basis. However, your financial obligations won’t be over once you complete the last interest payment.
That’s because you will still need to repay the actual loan amount to the mortgage provider. This loan amount needs to be paid separately in case of interest-only mortgages.
Repayment deals are more convenient for homeowners since it gives them full ownership of the property after the mortgage duration is complete. As you can guess, the monthly payment amount for such a mortgage is quite high.
That is why it is not preferred by landlords seeking a buy-to-let property. Instead, they go with the interest-only option, which provides greater flexibility and can be particularly helpful if the landlord encounters financial troubles.
3. Interest Rates
In the previous point, we stated that buy-to-let properties use interest-only payments because they are more financially favourable for the landlord.
However, you should keep in mind that the interest amount is fairly high and can even surpass the repayment mortgage amount of residential properties in some cases.
This is because the interest rates for buy-to-let properties can be higher than the interest rates for residential properties.
If the landlord owns multiple properties, these expenses will keep accumulating on top of each other, making it difficult for them to repay the debt. That is another reason why buy-to-let landlords sometimes favour interest-only mortgages.
Also read: Let-To-Buy Mortgages
4. Affordability
In addition to the deposit and the interest rates, a landlord has to keep in mind other types of expenses when purchasing buy-to-let properties.
These include maintenance costs, stamp duty and other taxes. Most of these extra expenses do not exist in the case of a residential property, which is why they are much more affordable by comparison.
Besides that, there are some other aspects that determine the overall affordability. Typically, landlords can only borrow from lenders if they are financially equipped to meet their obligations.
In this regard, the landlord will need to meet certain conditions when applying for buy-to-let mortgages. For starters, in some cases they will need to have a minimum annual income of £25,000, which is separate from the rental earnings.
Some lenders don’t have a minimum income requirement so always speak to a mortgage broker or do your research as if you don’t meet the income requirements you may still have options.
Moreover, the rental income should be high enough to cover at least 125% of the mortgage repayments. On top of this, the landlord needs to have a good credit record, which can improve the chances of their mortgage getting approved.
With a residential mortgage, the way in which lenders calculate affordability is different to a buy-to-let mortgage. In residential cases, your affordability will be determined by your income, outgoings and your ability to make the loan repayments based off this.
With a buy-to-let mortgage, in most cases the amount you can borrow is determined by the rent you will receive.
So you will need to bear this in mind when considering the right property to purchase as if the rental figure you will receive is low, this could affect your chances of borrowing the amount needed for your purchase.
Frequently Asked Questions
1. Is it illegal to rent a house without a buy to let mortgage?
Yes, in UK it is illegal to rent a house without a buy to let mortgage. If you have a residential mortgage on your property and you want to rent it out, you’ll typically need to obtain consent to let from your mortgage lender or switch to a buy-to-let mortgage.
2. Can I change my mortgage to buy to let?
Yes, you can switch your residential mortgage to a buy-to-let mortgage in the UK, often known as ‘let-to-buy’. However, you must meet certain lender criteria, including sufficient equity and proof that rental income can cover repayments.
3. Can I Live In My Buy-To-Let Property?
No, living in your buy-to-let property in the UK is typically against the terms of your mortgage. Buy-to-let mortgages are designed for properties that are rented out, not owner-occupied. Breaching these terms could lead to serious consequences from your lender.
Final Words
These are the aspects that make residential mortgages different from buy-to-let mortgages. If you are planning to purchase a property soon, you will find the information here to be pretty helpful.
Needless to say, you have to be financially prepared before applying for a mortgage. This is especially true if you want to own a buy-to-let property, as poor financial credentials may not be enough to get an approval from a lender.
Thus, you will need to prepare a reasonable budget that can help you with the expenses and have suitable plans in place to cover any costs if your property doesn’t have a tenant for a period or the tenant misses their payment.
**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.
I am CeMAP & CERER qualified mortgage adviser and have helped a number of clients realise their dreams when they thought it would not be possible. I’m skilled at getting mortgages sorted for people with a history of missed payments, CCJs, defaults, debt management programmes, IVAs and bankruptcies.
I am CeMAP (Certificate in Mortgage Advice and Practice) qualified mortgage adviser with a strong background in Finance. I specialise in providing expert advice on a range of mortgage products, including first-time buyers, remortgages, buy-to-let mortgages and bad credit mortgages.
