Buy-to-let (BTL) mortgages are for landlords who buy property specifically to rent out. They are usually more expensive than normal mortgages, but they could help you become a property investor.
Who can get a buy-to-let mortgage?
Buy-to-let mortgages are only suitable for people who want to invest in houses and flats. Investing in property is risky, so you shouldn’t take out a BTL mortgage if you can’t afford to take that risk. You’ll struggle to get a buy-to-let mortgage if you don’t already own your own home, whether outright or with an outstanding mortgage. You must have a good credit record and not be stretched too much on your other borrowings such as your existing mortgage and credit cards. And you are likely to find it harder to get a buy-to-let mortgage unless you earn at least £25,000 a year. Lenders will have their own upper age limits – typically between 70 or 75. This is the oldest you can be when the mortgage ends not when it starts. For example, if you are 45 when you take out a 25-year mortgage it will finish when you’re 70.
How do buy-to-let mortgages work?
Buy-to-let mortgages are in many ways just like ordinary mortgages, but with some key differences:
- Interest rates on buy-to-let mortgages tend to be higher
- The minimum deposit for a buy-to-let mortgage is usually a quarter (25%) of the property’s value (some lenders offer deals with a 20% deposit, others want a 40% deposit)
- The fees; valuation, legal costs and set up fees tend to be much higher
Most BTL mortgages are interest-only, which means you don’t pay anything off the lump sum borrowed each month but, of course, at the end of the mortgage term you repay the capital in full.
Unlike obtaining a mortgage on a property you wish to live in, BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA) unless you wish to let the property to a close family member (e.g. spouse, civil partner, child, grandparent, parent or sibling), then the mortgage is known as a Consumer Buy to Let mortgage and is regulated by the FCA.
How much can you borrow for buy-to-let mortgages?
The maximum you can borrow is linked to the amount of rental income you expect to receive. Lenders typically need the rental income to be a quarter to a third higher than your mortgage payment (25–30%). To find out what your estimated rent might be, talk to local letting agents or check the local press to find out rent charged for similar properties.
A buy-to-let property investment may be right for you if you:
- Prefer investments that feel more tangible than stocks and shares
- Are willing to tie up your money for a long period of time
- Understand property prices can go down as well as up
- Are willing to take the risk that you may not earn a profit on your investment
- Understand and accept the additional risks that go along with borrowing money to buy a property
- Understand and accept the costs and time involved in owning and running a property and the impact that this will have on your potential return
Risk and return
- The amount of rent you can charge varies according to a number of factors, including wider market trends outside your control. Rents are not guaranteed.
- If you can’t find tenants – or if you can’t charge the rent you expected – you may not be able to cover your mortgage repayments.
- If house prices fall, the value of your property is likely to fall as well. You may not be able to sell it for as much as you hoped.
- If you have to sell and the sale price doesn’t cover the whole mortgage, you’ll have to make up the difference.
- Major repairs or difficult tenants may increase your costs – and trouble – unexpectedly.
- If the housing market does well, you may be able to sell your property for a profit.
Where you can get a buy-to-let mortgage?
Most of the big banks and some specialist lenders offer BTL mortgages. It’s a good idea to talk to a mortgage broker before you take out a buy-to-let mortgage, as they will help you choose the most suitable deal for you. A further option when purchasing another property is to obtain a second charge mortgage, using your existing home as collateral.