Buy to let mortgages: A beginner’s guide

Welcome to our Buy-to-Let Guide, your ultimate resource for navigating the dynamic world of property investment. If you are a newcomer exploring the potential of rental income, this guide is tailored to provide you with insightful information and strategic advice.

What is a buy-to-let mortgage?

A-buy-to-let (BTL) mortgage is a loan that is taken out to fund a property that will be rented out to private tenants.

How do buy to let mortgages work?

Buy to let mortgages work like a traditional residential mortgage in many ways apart from the way lenders calculate if you can afford it.

Rather than looking at your income to determine borrowing, lenders focus on the rental income the property will generate.

Other differences include the fees and interest rates being traditionally higher than residential home owner mortgages.

It’s also worth noting that many buy-to-let loans (mortgages) are not regulated by the Financial Conduct Authority (FCA) unless you are renting to a family member.

Who can get a buy-to-let mortgage?

A buy-to-let mortgage is a type of mortgage specifically designed for individuals or companies who want to purchase property with the intention of renting it out to tenants. However, the eligibility criteria for obtaining a buy-to-let mortgage can vary between lenders and may change over time.

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

In order to secure a mortgage for an investment property, you will typically be required to provide a deposit of around 25% of the property’s total value. Just like with residential mortgages, the larger your initial deposit, the more favorable interest rate you can obtain. The most advantageous buy-to-let offers are usually accessible to investors who can provide deposits of 40% or more.

When evaluating your financial eligibility, lenders will consider your existing portfolio and your past track record in obtaining and successfully repaying buy-to-let  and residential financing.

How much can I borrow with a buy to let mortgage?

The amount you can borrow is based on the expected rental income of your property.

Lenders will typically need the rental income to be at least 125% of the monthly mortgage payments.

We offer buy to let mortgages normally with a minimum borrowing amount at £25,000 and a maximum up to £2,000,000 .

As we’ve mentioned, lenders look at different things when processing buy to let mortgage applications compared to ones for owner-occupied properties. They will consider the eligibility of both you and the property.

Your eligibility

Lenders will look at your:

• Personal gross income. This is how much you earn before any taxes are deducted. This can be required to be at least £15,000 or £25,000 – especially for first-time landlords – separate to the money brought in by the rent.
• Credit record & conduct history
• Homeowner status. Most lenders require potential landlords to be homeowners and have lived in the property for at least six months.
• Lenders will often require you to be resident in the UK to offer a buy to let mortgage.
• Lenders often impose a minimum age of 25 years and a maximum age for the end of the mortgage. This means that you can’t be older than that limit when the mortgage matures. It’s typically 70 or 75 years old, but some providers offer up to 115 years.
• Existing number of buy to let mortgages. Owning multiple buy-to-let properties is possible; however, some lenders exercise caution when dealing with numerous buy-to-let mortgages. The quantity of mortgages offered may differ among various lenders. Some don’t impose any limits (as long as you can make the repayments), but for others the limit is three or four buy to let mortgages per landlord. Alternatively, lenders might cap out at a total borrowing amount, usually around £2 million.

If you have more than three buy to let properties, you qualify as a “portfolio landlord”. That means that all your properties are considered when you apply for a new buy to let mortgage, so any underperforming ones could limit your mortgage options.

The property’s eligibility

Lenders will look at its:

• Lenders require that the property is in the UK, but there can be further restrictions applied (such as in Scotland).
• Minimum valuation. The lender will only offer on properties valued above a certain price. Usually the minimum is around the £40,000 to £50,000 mark but can be up to £90,000 or £100,000.
• Property type. Some properties (such as former social housing, new build flats, studio flats, etc.) can be harder to secure loans for.
• Construction. The materials used to build the property can affect your mortgage options. Some lenders consider non-standard materials (not brick or stone walls, not a slate or tiled roof) to be of a higher risk.
• Expected rental income. Lenders mandate that the rental income must sufficiently exceed the mortgage repayments, leaving room to accommodate additional expenses. To compute this, the lender employs either a rent-to-interest (RTI) calculation or an interest cover ratio (ICR). The amounts vary between mortgages and lenders, but most commonly the rent must cover the mortgage payments by 125 to 130%. Some lenders can ask for up to 150%.

How long does a buy to let mortgage last for?

Buy to let loans are a type of mortgage and so long-term borrowing is the norm. The length depends on the lender, but they are typically around 25 years but you can have longer terms up to as much as 40 years.

How long does it take to get a buy-to-let mortgage?

The duration of obtaining a mortgage offer and completing a property purchase can vary based on several factors, including:

• Mortgage offer timeline:

This is the period it generally takes for a lender to review your mortgage application, perform the necessary checks, and make a decision regarding whether to offer you a mortgage.

The exact duration can depend on various factors such as the complexity of your financial situation, the lender’s workload, and the accuracy and completeness of your application. It is typically 2-4 weeks to receive a mortgage offer.

• Property purchase completion:

Completion refers to the finalisation of the property purchase, where all legal and financial aspects are settled, and ownership is transferred from the seller to the buyer. Completion depends on the duration of the property purchase. It depends on various factors, for instance, if the property is part of a chain, the property type, and local factors, to include a few.

What happens if I don’t repay the buy-to-let mortgage?

As with any loan or mortgage, you will risk having a negative impact on your credit rating and credit history, and ultimately, you risk losing your rental property.

How is the buy to let mortgage repaid?

There are two options to repay the buy to let mortgage – interest only and repayment.

• Interest-only buy to let mortgage – these only pay the interest back to the lender. That means that you’ are only repaying the interest every month and will not repay the capital (money borrowed) until the end of the loan’s term. You must make separate arrangements to repay the capital, known by lenders as “repayment vehicles”. Interest-only mortgages are the most popular buy to let option for borrowers in the UK.
• Repayment buy to let mortgage – these repay both the capital and the interest in every payment. They’re paid in regular instalments over a fixed period.

How is the interest charged on a buy to let mortgage?

The two main ways to charge interest on a buy to let mortgages are with a fixed or a variable rate.

• Fixed-rate – as the name suggests, this interest rate remains constant throughout a period of the mortgage. It’s unaffected by any changes to market interest rates, making it great for budgeting. Payments will not go up when rates rise but also will not go down when rates drop.
• Variable rate mortgages – these mortgage rates can go up and down – making them more unpredictable than fixed-rate mortgages. The three main types of variable rate mortgages are tracker, variable and discount.
  • Tracker rate mortgages – so called because they “track’ another rate, most commonly the Bank of England’s base rate, and so your mortgage’s interest rate changes to reflect these changes. A tracker rate is not the same as the base rate, instead it’s set at a margin, or percentage, above it. These mortgage rates save you money when the base rate is low but can cost you more when it goes up.
  • Variable rate mortgages – these rates are managed by the lender, rising and falling when they decide. Also known as a managed rate or standard variable rate (SVR), this rate often follows the base rate, but at a higher margin or percentage than a tracker.
  • Discount rate mortgages – a discount is applied to the interest rate (usually the lender’s variable rate). The margin is fixed but the rate isn’t. These usually are offered for 3 to 24 months, with 24 months the most common. These can be slightly misleading – being called discount doesn’t always make them the cheapest deal.

When you contact Mortgage Decisions will be happy to discuss your needs and circumstances, then point you towards the best options for you.

Can I get a buy-to-let mortgage as a first-time buyer?

Yes, it is possible to get a buy-to-let mortgage if you are a first-time buyer, but it is not necessarily an easy task. Lenders will view you as high-risk, as you’ve yet to own a property. You will need a minimum of 25% deposit, meet the minimum income and affordability check, meet the employment check, and have a good credit history.

Few things you should bear in mind:

• You will also be giving up certain advantages that are accessible to first-time buyers, particularly concerning stamp duty. If the first property you acquire is not intended for you to live in, you will not meet the criteria for first-time buyer relief. The good news is that you won’t pay as much as a non-first-time buyer when purchasing a buy-to-let. Instead, you will be charged ‘the home mover’ rate which is the same as a non-first-time buyer would be on any residential property.
• When you are ready to buy a property to live in, while holding on to your buy to let property, you have to pay the second home surcharge (which is usually 3% on top of the standard stamp duty).
• You may find it difficult to get a mortgage on your first home to live in yourself, as lenders will assess any debt you have outstanding on your buy-to-let mortgage.

Can I move into my buy-to-let property?

Yes. If you decide to move into the buy-to-let property yourself after a few years, you can then switch your buy to let mortgage to a residential mortgage but only with the lenders’ permission.

How to switch to a buy-to-let mortgage?

Becoming a landlord doesn’t always happen by deliberate choice. For instance, you might find yourself inheriting a property or changes in your situation might lead you to move back to renting, prompting you to decide to lease your own house.

Irrespective of the path to becoming a landlord, it’s essential to inform your mortgage lender if you plan to rent out a property for which you still have an outstanding owner-occupier mortgage.

Lenders view buy-to-let properties as carrying higher risks. Therefore, failing to communicate with your bank about this arrangement could potentially void your mortgage agreement.

Some lenders might provide you with ‘consent to let’ within your existing agreement, while others might require you to switch to a buy-to-let mortgage.

What is the difference between buy-to-let and buy-to-consent?

In the scenario where you intend to rent out your property for short-term periods, it’s essential to acquire permission from your residential mortgage lender. This arrangement is referred to as Buy-to-Consent.

Numerous lenders stipulate the necessity of obtaining a buy-to-let mortgage due to the inherent risks associated with leasing a property. These risks include situations where you might face challenges in covering your mortgage payments if your tenants cease rent payments or if the property remains unoccupied.

What taxes do you pay on buy-to-let?

You’ll be required to pay Stamp Duty Land Tax and Income Tax when you get a buy-to-let property. You’ll also have to pay Capital Gains Tax if you choose to sell the property.

1. Stamp duty land tax on buy-to-let properties (SDLT)

Stamp Duty Land Tax is applicable to properties and land in England and Northern Ireland that exceed a particular value threshold.

If you purchase a residential property that isn’t your primary residence, such as a second home or a property for buy-to-let purposes, an additional 3% surcharge is added on top of the standard Stamp Duty rates.

2. Income tax on buy-to-let properties

Owners of buy-to-let properties are also obligated to settle Income Tax on the rental earnings generated. An allowance of £1000 is permitted and certain expenses can be subtracted.

As of September 2021, the tax rates for individuals were:

• Basic rate (up to £50,270): 20%
• Higher rate (£50,271 to £150,000): 40%
• Additional rate (over £150,000): 45%

3. Capital Gains Tax (CGT)

If you sell your buy-to-let property and make a profit (capital gain), you may be liable to pay Capital Gains Tax. The rates for CGT can also vary depending on your overall income and other factors. As of my last update, the rates for individuals were:

• Basic rate taxpayers: 18%
• Higher and additional rate taxpayers: 28%

There are also various reliefs and allowances that could apply, such as the annual tax-free allowance for CGT, called the “Annual Exempt Amount.”

What costs are involved with taking out a buy-to-let mortgage?

Apart from the initial deposit required to secure a buy-to-let mortgage, there are also some other costs to consider including broker fees, lender fees, valuation fees, legal costs and stamp duty. Sometimes lenders will include the legal costs in the mortgage offer.

What documents are required for a buy-to-let mortgage?

In general, most mortgage lenders require you to provide:

• Proof of income with your last three months’ bank statement
• A mortgage statement for your existing property
• Proof of expected rental income
• Proof of deposit
• Proof of ID
• Proof of address
• Current or most recent P60
• Your last two years of tax returns (if you are self-employed)

How do I apply for a buy-to-let mortgage?

Simply call us 03454 500200 or email hello@mortgagedecisions.com

We open Mon to Fri: 9 am to 5 pm, Sat: 9 am to 2 pm and closed on Sunday.

Contact us today and we’ll do all we can to get the best buy-to-let mortgage rate for you.

How does the mortgage process work?

The process is quick and simple at Mortgage Decisions. Initially, we would discuss the options and potential lenders that would be suitable and then we would apply to a lender for an agreement in principle to give you confidence if you would like to offer on a suitable property.

Once a property has been found we will then present our recommendations after searching the marketplace, and with your agreement we would then submit a mortgage application.

Our admin team will then take over and communicate with the lender until the mortgage offer is produced. Once you have your mortgage offer we will assist in chasing your conveyancing through until exchange and completion.