A buy-to-let mortgage is a way that you are able to borrow money from lenders to purchase an investment property. As the term suggests, these mortgages are for when you are buying a property to let out. Often buy-to-let mortgages are taken out as interest-only mortgages. This means that the original loan amount is not being paid off; it is just the interest on the loan amount. Repayment buy-to-let mortgages are available, though.
In this article we’ll discuss features of a buy-to-let mortgage, and things to consider before obtaining this type of mortgage. We’ll also explain why it may be sensible to liaise with a mortgage expert before applying.
Features of a buy-to-let mortgage
Often, buy-to-let mortgages are deemed by lenders to carry a higher risk factor than residential mortgages. This is in part because of the potential for times where the property is between tenants. Many landlords use rental payments to cover their monthly mortgage payments. If they do not have rent coming in, landlords may not be able to meet this financial obligation. To protect themselves from this added layer of risk, lenders require additional eligibility criteria to be met prior to acceptance. Some of these are detailed below:
Home-owner
Those applying for a buy-to-let mortgage are usually required to own their home. This may be outright ownership or with a mortgage.
Good credit score
Lenders will typically expect buy-to-let mortgage borrowers to have a good credit score. This may be achieved by making credit card payments on time, registering on the electoral roll and making sure your credit report has no errors. You can find out more about how to boost your credit score in our blog post from the end of last year.
Loan-to-value requirements
A loan-to-value (LTV) ratio is how much you are looking to borrow as a percentage of the property’s value. If the LTV ratio is 85%, for example, this means the deposit you must pay on the property is 15%. For buy-to-let mortgages, lenders may require a lower LTV ratio, for example 75%. This is in order to lessen the risk on the lender. It means you must have a higher proportion of the property’s value to secure a buy-to-let mortgage.
Rental yield
Your eligibility may also depend on the projected monthly income you’ll receive from the rental property. This is known as the rental yield. Many lenders require the rental yield to be 125% of the annual mortgage payments. This leaves room for contingency if there are any additional costs to pay.
Other eligibility criteria
Some lenders may have additional eligibility criteria, including a maximum age restriction. They may also require prospective borrowers to provide evidence of employment income.
Things to consider before taking out a buy-to-let mortgage
Contingency funds
It is important to ensure you have contingency funds available. These may be needed to cover periods of time when your rental property may be unoccupied, or if rent is not paid. Regardless of the occupational status of your property, your mortgage payments still need to be paid.
Landlords also have commitments that they are responsible for, for example if the boiler breaks, general upkeep and repairs. Landlord insurance and annual safety checks are also payments required to be made by the landlord.
Interest rates for buy-to-let mortgages are often higher than for residential mortgages. This could increase the monthly payments for this type of mortgage.
Stamp Duty on investment properties
Other financial considerations include the stamp duty that must be paid on your investment property. When purchasing a buy-to-let property worth over £125,000. Prior to the 2025 return of stamp duty thresholds to their pre-September 2022 levels, the surcharge on investments properties has also increase (as of October 2024) from 3% to 5%. This means that stamp duty on investment properties is now 5% higher than for the equivalent threshold on a residential property.
Taxes
Landlords must declare income from investment properties, and received rent is subject to income tax. The costs of running the property can be deducted off the rent received for tax purposes. This may include the cost of redecorating prior to re-letting the property, for example.
Capital Gains Tax will be charged should you decide to sell your investment property. This tax is on the profit you have gained on the property. It is the value that has been added to the property during the time you have owned it. The level of Capital Gains Tax is currently 18% for basic-rate taxpayer and 24% for higher-rate taxpayers.
How can Bell Mortgage Solutions help you?
Buying a property to let is a long-term investment. It is not without risk, both to the lender and you as the buyer. The rules surrounding eligibility for buy-to-let mortgages can be complicated and difficult to understand. Enlisting the help of a mortgage broker such as Bell Mortgage Solutions can assist you in making sense of the jargon and the criteria. We will get an understanding of your circumstances from you, and will help you to find the best mortgage deal for you.
If you are looking to let out a property you have previously resided in, your lender must be informed of this change of use. Some lenders may offer a ‘consent to let’ on your existing deal, or you may be able to switch to a buy-to-let mortgage. Bell Mortgage Solutions will be able to assist you in traversing this process, offering expert guidance.
Contact our team now to find out more about how we can help you find the best buy-to-let mortgage for you.
Please note: Your home may be repossessed if you do not keep up repayments on your mortgage.
Most Buy-to-Let Mortgages are not regulated by the Financial Conduct Authority.
The information contained within was correct at the time of publication but is subject to change.
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