What we cover in this guide
- What is a Buy-to-Let mortgage?
- Try our Buy-to-Let mortgage calculator
- Understanding Buy-to-Let mortgages
- How do I qualify for a Buy-to-Let mortgage?
- Can I get a Buy-to-Let mortgage on any property?
- How much deposit do I need for a Buy-to-Let mortgage?
- Are Buy-to-Let mortgages more expensive?
- Are Buy-to-Let mortgages worth it?
- Using a Buy-to-Let mortgage broker
- Buy-to-Let mortgage FAQs
What is a Buy-to-Let mortgage?
It’s a loan secured on a property that has been purchased with the intention of renting it out. It cannot be used as a residential home.
Buy-to-Let mortgage rates and fees differ from those for a standard residential mortgage, as do lender’s eligibility criteria. This is usually based on the buyer’s circumstances and the determined income generated by the property.
Finding a lender with a product and criteria that match your situation can be quite complex and time-consuming. So, consulting with a mortgage broker can make the process a little more straightforward.
Can I get a Buy-to-Let mortgage if I don't own a residential property?
Yes, it is possible to get a Buy-to-Let mortgage if you don’t own a home. More and more people are becoming Buy-to-Let landlords in this situation.
However, it may be more difficult to get a Buy-to-Let mortgage as a first-time buyer. The lender would be likely to make sure you could afford the mortgage on a residential basis. Whatever your circumstances, you will need to provide information about your current property portfolio as well as income and rental evidence.
It’s also possible to get a Buy-to-Let mortgage under a limited company. Keeping your business and personal finances separate can make sense in many circumstances. Whether you need to use a limited company Buy-to-Let mortgage may depend on your tax status and investment goals.
How can I maximise my Buy-to-Let rental profits?
This is a question we often hear from many landlords, both new and experienced. There are a few options you could consider:
- Turn your property into an HMO (home in multiple occupation)
Choosing to rent out your property on a room-by-room basis can significantly increase your lettings income. However, you will need to get the relevant permission from the Local Council.
- Choose properties with good rental yields
It might seem like a good idea to buy a property for £300,000 and let it out for £1,200 per month, but it’s worth considering alternatives. Purchasing two properties each worth £150,000 that you can let out for £750 will give you far more return on your investment, as well as splitting your risk of a default on any rent payments.
- Get the right mortgage advice
Experienced, professional advice can be worth just as much to you as increasing profits from other methods. A specialist broker can help you to access the most favourable deals and will be invaluable when it comes to the small print. The lowest mortgage rate initially might not be the cheapest in the long run, when considering other fees.
- Choose an interest-only mortgage
Paying only the interest amount each month, instead of a repayment amount as well will reduce your monthly costs. However, you will need to make sure you have a way to pay off the mortgage long-term.
What's the best–fixed or tracker Buy-to-Let mortgage rates?
As with a personal mortgage, much will depend on how risk-averse you are as a landlord. Obviously, a fixed interest rate means your monthly rate doesn’t change, however, it’s usually higher than a tracker rate. You’ll lose out should interest rates fall, but you will be protected in the case of a rise in the Bank of England base rates.
A tracker mortgage might carry a slightly cheaper interest rate but it does come with the risk of monthly payments increasing in line with any rises in the Bank of England base rate. The attraction is obviously that the rate will drop if the base rate falls as well. Your decision may rest on where you see the pattern of interest rates at the time of you obtaining the mortgage.
Buy-to-Let fixed rate mortgages
This type of mortgage allows you to maintain a fixed rate of interest for a certain period–usually two, three or five years. This means your monthly payments will be predictable throughout this time, and you’ll be protected from any changes in the economy; an unexpected rise in the Bank of England base rate. Conversely, if the Bank of England rate drops, you will miss out on any savings.
Buy-to-Let tracker rate mortgages
The interest rate for this type of mortgage is usually a certain percentage rate (or fraction of a percentage) higher than other various rate indexes. It will be set and then ‘tracked’ for a fixed period–usually two, three or five years. The most common rate to track is the Bank of England base rate, however, some specialist lenders will follow the ‘LIBOR’ (London Inter-Bank Offered Rate).
If the index your mortgage is linked to rises, then so will your interest payments. Similarly, if it drops, then your interest payments will decrease by the same percentage. In the long run, taking this risk could either save you money or cost you more.
You do get some immediate savings, as the rates offered by the lender for a tracker rate are usually a little cheaper than those for a fixed rate. So, if interest rates remain level throughout your term, you will have saved money in comparison to what you would have paid for a fixed rate mortgage.
Can I get a Buy-to-Let mortgage on a leasehold property?
Yes, this is entirely possible – there is no difference between a mortgage for a Freehold or Leasehold property if an appropriate lease is in place. You should always bear in mind that Leasehold properties will have extra associated costs, such as ground rent and annual service.
The only problem that will set you back regarding your mortgage will be if the remaining period on the leasehold is too short. If there is less than 70 years on the leasehold term, it will negatively impact the property value and therefore the mortgage value and duration. However, it may be possible to negotiate a new or extended lease with the current property owner and/or the landlord.
Lenders will take any regular charges for services and facilities into account when making their affordability calculations and defining how much they will be willing to let you borrow against the potential rental income. It’s important for you to understand what these costs will be and if any future increases will impact your investment’s net income.
The actual owner of the Freehold on the building will also be considered within the mortgage application. In the past, property investors may have had an interest in the Freehold and were also taking out a Leasehold on a property within it, but many lenders are now no longer happy to extend a mortgage if this is the case.
Anticipated Rental Income
Lenders will define affordability based on the anticipated rent you would be expected to achieve. Lenders will also consider the borrower’s income tax status and fixed mortgage rate period. Each lender’s calculations are different, however, as a guide, the rental income would be expected to be 125% of the mortgage interest, based on a notional rate of 5%. This would build in an element of safety for all concerned in the case of unforeseen interest rates rising.
Income and Tax Status
In a big divergence from residential mortgages, lenders do not always need to see evidence of an independent earned income. Many will consider your application even if the rent from the property is your sole income, but others will want to you to show a minimal income outside of that made from rent of the property – perhaps £25,000 or more.
The Amount of Deposit or Equity
Lenders will normally expect to see a down payment of around 20-25% of the value of the property, this can change with market trends. If the anticipated rental income is expected to be sufficient, they could be willing to extend a mortgage with an LTV (loan-to-value) ratio of 75-85%.
Other Rental Properties
If you own a number of properties to let, then you will be considered a ‘portfolio landlord’. Lenders may take a favourable view of the overall lending risk. The best way to get an accurate view of how a lender will approach your application is to speak with one of our specialist mortgage advisors.
What are the costs for a Buy-to-Let property?
Before you purchase a property as an investment, you need to understand all the costs that go with property ownership.
As you are receiving income from the letting of the property, rent, this must be declared and will be subject to tax. However, as chancellors and budgets come and go, the method by how the tax is calculated continues to change. This caused an increase in demand for ‘Limited Company Buy-to-Lets’, as more landlords want to be tax-efficient.
Capital Gains tax
As you may have to pay tax on the profits if you sell the property in the future, it’s wise to consider how capital gains tax will affect your income and cash flow at the time.
As a property owner, you will have a legal responsibility to the people living in your property. It must be legally habitable and maintained to a certain standard. This obviously comes with a cost, so you should be sure to allow for this in your budget. As we all know problems such as failed boilers or broken roofs can happen out of the blue.
HMOs (houses of multiple occupation) can attract different rules and further costs, so it will pay to do your research into the regulations where you live before going into business as a landlord.
You may wish to manage your property yourself, dealing with all the paperwork, collections and demands of your tenants. However, some prefer to enlist the services of an agent to handle the day-to-day management on your behalf.
This of course comes with another cost–usually a fee of around 10-15% of the rental income. You might also be required to pay administration fees for each new tenancy and the landlord agreement. Again, it’s best to do your research locally.
Setting up a property investment and letting business as a limited company can offer income tax benefits. You should remember that the profits of your limited company will be subject to corporation tax. A limited company also incurs an initial cost of registering with Companies House and you will also have to pay a certified accountant to file company accounts.
Product transfers on Buy-to-Let mortgages
What happens when you want to move your Buy-to-Let mortgage from one lender to another? It’s extremely important to make sure you have the best mortgage deal to suit your individual circumstances, and that the property can provide a sufficient income to accommodate monthly payments and costs.
Whether your mortgage is a fixed or variable rate, it is likely to have an end date to an initial deal period of two, three or five years. After this period, it will revert to the lender’s standard variable rate. As this rate is higher than the initial deal, borrowers will usually try to secure another deal that suits them better.
In this situation, most borrowers will look to other lenders to find a favourable deal on a remortgage product. However at The Mortgage Centres we also consider what your current provider can offer you, via a product transfer.
Overall, mortgage cost will always be the main factor, but there are benefits to remaining with your current provider:
- No need for additional underwriting
- No need for recalculations of the permitted loan amount based on rental income
- No property valuation needed (unless it would be to your advantage and the lender offers it)
- No solicitors, or their fees, required
- Far less paperwork for you to handle
- Can I port my Buy-to-Let mortgage?
- Can I get a Buy-to-Let mortgage with bad credit?
- Can foreign nationals get a Buy-to-Let mortgage?
- Can an expat get a Buy-to-Let mortgage?
- Can I get a Buy-to-Let mortgage on a new-build property?
- Do I pay more Stamp Duty when buying a Buy-to-Let property?
- How many Buy-to-Let properties can I have?
- What is a regulated Buy-to-Let mortgage?
Porting depends on the lender criteria at the time. Most lenders will allow you to port a deal should you meet this criteria.
There are specialist lenders in the market who are prepared to lend to those potential investors with a bad credit record. Adverse credit events that will need to be considered are:
- CCJs (County Court Judgements)
- IVA (Individual Voluntary Arrangements)
- Discharged bankruptcy
- Debt management plans
It’s important to remember that the amounts involved, the severity of the event, and the amount of time that has passed, as well as the applicant’s current financial situation, will affect the view taken by the lender when they consider the mortgage application.
It’s absolutely possible, but how difficult the process will be will depend largely on their residential and employment status. If you’re a resident in the UK, have the right to live here permanently, are here on other forms of Visa such as Tier 2, then there should be minimal issues. Your employment status and length of time spent in the UK may also have a bearing.
However, things will be a lot more difficult if you are a foreign national no longer living in the UK. But there are specialist lenders available out there. The product options may be rather limited and you might background checks to be a little more thorough than usual, as there is an increased risk to the lender.
Most mainstream lenders will not entertain the additional perceived risk involved with extending a mortgage on a UK property to individuals based outside of the country. And those that will undertake this plan will apply for tighter criteria for underwriting. Perhaps if the applicant is working for a global employer, this will help your case, but it is no guarantee. What is certain is that a lender will demand a higher deposit–perhaps in the region of 25-30% or more.
Buy-to-Let mortgages for expats is a very specialist area of mortgage underwriting, and lenders in this sector typically use their own very individual criteria. For this reason, it’s recommended that you discuss your situation with an experienced mortgage broker with knowledge in this field.
When looking for a Buy-to-Let investment opportunity, there is no difference between buying a new-build or an existing property. As usual, the lender will state a minimum deposit required and the anticipated rental income will be a key factor in their calculation.
It’s true that when purchasing a Buy-to-Let property, you will be likely to pay more Stamp Duty. The government introduced new Stamp Duty rates in 2016, so anyone buying a second or additional property will have to pay an extra surcharge of 3% on top of the current rates
There is no official limit on the amount of Buy-to-Let properties you can own. There are a number of landlords who have an extended portfolio of properties that they manage in the course of their property business.
However, some lenders will impose their own limits on the size of the portfolio you can hold with them.
Most mainstream lenders will usually be content with a maximum of 10 properties, with at most 4 under mortgage. They may also impose a cap on the total level of borrowing between £2M-5M. However, this all depends on the lender.
If you have three or more investment properties, you are normally viewed as a ‘portfolio landlord’ so lenders will be more thorough with their underwriting criteria. They will often carry out a full analysis of your portfolio and may require your income tax assessments. They may also need things like copies of your tenancy agreements.
Typical Buy-to-Let mortgages that are taken out on properties solely for investment purposes, are not regulated by the FCA (Financial Conduct Authority).
A property will become regulated when the property is occupied by a family member or will be in the future. This usually refers to immediate family – siblings, parents, grandparents, or children.
Extended family members are not classed in the same way so a conventional Buy-to-Let mortgage would be suitable.
There are exceptions to this rule – if your family member was living in less than 40% of the property. Typically applying in the case of an HMO where there are multiple non-related occupants also residing. As ever, you should consult with an expert before making any final decisions.