What is a Buy-to-Let Mortgage? Everything You Need to Know

If you’re looking to let out a property and want to make a steady income through monthly rent payments, you’ll need a buy-to-let (BTL) mortgage. They can be a great way to save for the future, but they also come with a lot of risks.

To help you work out if they’re right for you, take a look at our guide to buy-to-let mortgages. We’ll cover how they work, who they’re for, and what you need to get started with one.

What is a buy-to-let mortgage?

A buy-to-let mortgage is designed for anyone who wants to purchase a property and rent it out to tenants. Since they’re specifically intended for those who are investing in property to let, different rules apply when it comes to securing one and they are not suited for everyone.

Who are buy-to-let mortgages suitable for?

BTL mortgages certainly aren’t for everyone. They’re suitable for those who are actively looking to invest in property and can afford to do so, as just like any other investment, purchasing a property comes with its risks.

Naturally, they’re ideal for experienced investors and existing landlords.

Who buy-to-let mortgages aren’t suitable for

There are also a few key indicators for who a BTL mortgage might not be suitable for:

If you’re a first-time buyer – first-time buyers would likely struggle to get a BTL mortgage. As the interest rates are higher, it’ll be more difficult to prove to a lender that they can afford the repayments and they are more likely to have their application rejected.
If you have a poor credit history – a strong credit rating shows that you can handle your finances. If you are stretched too thin or have too many outgoing payments, such as credit cards or your existing mortgage, then you may not be able to prove you can afford the monthly repayments.
If you earn less than £25,000 – as well as a good credit score, lenders will want to see that you have a steady income. The boundary tends to be around the £25,000 mark, so if you earn less than this, you may struggle to secure your loan.
If you’re over a certain age – lenders will take age into consideration and often have a maximum limit for how old you will be when your mortgage comes to an end. This is generally between 70-75.

As with any long-term investment, whether you are purchasing a property to let out or to live in, it is essential that you take the time to evaluate your individual circumstances to decide whether it is right for you.

Do as much research as possible and seek help from a trusted mortgage adviser in your local area. They will be able to analyse your finances to see if you are in a position to make an investment. The key is not to rush into any big decisions; this is a pretty big life-altering choice so take the time to ensure it is right for you.

How does a buy-to-let mortgage work?

In principle, a buy-to-let mortgage functions in the same way as a standard mortgage: a person borrows money from the bank to purchase a house and repays a certain amount every month, with interest.

However, there are some noticeable differences:

Deposit

The minimum deposit required to secure a buy-to-let mortgage will tend to be higher than that needed for a residential mortgage. Those taking out a loan for a BTL mortgage are more of a risk to lenders than borrowers who live in their properties, so a bigger deposit offers a higher grade of security.

Interest rates

The monthly payment of a mortgage is made up of a lump sum that comes off the mortgage itself, plus a percentage of interest.

Interest rates for BTL mortgages are significantly higher than those for residential mortgages. Again, this is to ensure security for the lender should you have periods with no tenants renting out your property and can’t make your monthly payments.

Fees

Alongside the deposit, there are additional fees and costs that anyone applying for a BTL mortgage will have to pay.

These can include:

Stamp duty — a tax paid on residential properties purchased over £125,000
Surveyors’ fees — the cost for an inspection of a property to determine its value
Tax on rental income — a tax paid on the amount you make from renting a property
Building insurance — the cost to cover a property in case anything goes wrong with it
Landlords’ insurance — the cost to cover landlords from risks connected to their rental property
Rent insurance (optional) — the cost to cover a tenant’s loss of or damaged possessions in a rental property
Letting agents’ fees (if you opt to use them) — the cost of the initial set-up and a monthly percentage of a landlord’s rent if using a letting agent to let out a property
Maintenance and repairs for the property – expenses paid by the landlord when their property is in need of repair

What are the interest rates for a buy-to-let mortgage?

Interest rates are calculated based on:

– How much you initially borrowed
– The value of your property
– Your financial situation
– What your rental income is expected to be
It will also largely depend on what type of mortgage you take out. BTL mortgages can be at a fixed or variable rate.

Types of buy-to-let mortgages

There are typically four types of buy-to-let mortgage:

A fixed-rate mortgage

Your monthly interest payments will remain the same for the full term of your mortgage, which typically lasts between two to five years. This fixed amount means that you’ll know exactly how much you need to pay each month.

A standard variable rate mortgage

These are often the most expensive type of mortgage with the highest interest rate. This rate can change at any time, but you are free to change your mortgage plan without having to pay any exit fees. As of October 2021, the Bank of England Buy-To-Let Variable Rate is 4.44%.

A discount variable mortgage

This type of mortgage applies a pre-agreed discount that’s below your lender’s standard variable rate. Like a standard variable rate mortgage, the rate can change.

A tracker mortgage

The rate of interest is variable, so your monthly interest payment amount can fluctuate. The interest rate is set at a level above the Bank of England’s base rate, so your interest can go up if the Bank of England raises its rates. Conversely, if its base rate falls, so will your interest rate.

Where can you get a buy-to-let mortgage?

Most of the big banks in the UK will offer buy-to-let mortgages, as will building societies.

Other lenders include supermarkets like Sainsbury’s Bank and Tesco Bank. You can even find buy-to-let mortgages from some insurance providers, such as The AA and First Direct.

Choosing your BTL mortgage provider will come down to finding one with the best mortgage type and rates that best suit you.

If you’re looking to take out a BTL mortgage for a property in Scotland, the process is generally the same as if it was in England or Wales, except for two key differences:

No ‘Right to Rent’ check

Landlord with properties in England and Wales must check that their tenants are legally able to rent their property. Landlords in Scotland aren’t required to do this.

No stamp duty tax

The Stamp Duty Land Tax that landlords in England and Wales have to pay doesn’t apply to those in Scotland. Instead, they pay Land and Buildings Transaction Tax (LBTT) when purchasing a property.

The structure of this tax works by making the percentage of payable tax proportionate to the price of each individual property. Therefore, the percentage rates are different for each LBTT band, which apply to different types of properties.

How much deposit do you need for a buy-to-let mortgage?

The minimum deposit for a BTL mortgage is around 25% of what the property is valued at, though it can vary between 20-40%.

Most buy-to-let mortgages are also interest-only, which means that you would only pay the interest as it accrues each month. And at the end of the agreed mortgage term, you would need to repay the original loan in full.

While this is the most popular option as it helps to lower monthly outgoings and maximise rental income, you can also choose to go with a capital repayment plan. This means you’ll pay back your loan each month along with some of the interest that has accrued. The benefit of this is that at the end of the term, you will have paid off your mortgage and you’ll own your property outright.

How much can you borrow for a buy-to-let mortgage?

This depends on how much you can put down for your deposit. Personal circumstances and how much you’ll be charging to rent the property out will also play a factor, with the maximum amount that you can borrow often being linked to how much rental income you’re estimated to receive.

Lenders will prefer that your monthly rental income is 25-30% higher than your mortgage payment so they can be sure that you’ll be able to cover your repayment costs.