If you are looking to purchase a property, you may need to borrow money to make it affordable. This usually takes the form of a mortgage. The type or mortgage you require will depend primarily on the purpose of the property. If you are planning to reside in the property, a regular residential mortgage will be needed. If you plan to let out the property, a buy-to-let mortgage is needed. But what are the differences between these mortgage types? In this article we’ll discuss differences including repayment types and affordability along with other considerations you must make.
Intended use of property
As mentioned above, the intended use of the property is one key difference in these mortgage types. A buy-to-let mortgage allows you to borrow money for an investment property. It is not permitted for the owner to live in a property with a buy-to-let mortgage. On the other hand, in most instances, property owners should not let out a property that has a residential mortgage. There may be some cases where an individual becomes an ‘accidental’ landlord. This may be through a property inherited, for example, or a temporary let. In these cases it may be possible to arrange with the lender for a ‘consent to let’. This is a formal, written agreement with the lender allowing the borrower to rent their property on a temporary basis, whilst remaining on a residential mortgage.
Mortgage eligibility
Buy-to-let mortgages are considered higher risk for lenders. This is because the ability of a borrower to make their mortgage payments each month could depend on tenant occupancy. The eligibility criteria is therefore often stricter than for a residential mortgage, and may result in higher interest rates. For both mortgage types, lenders will look at the applicant’s credit history, deposit size, income and existing debt. The bar that must be reached for each of these, though, is likely to be higher for a buy-to-let mortgage.
Along with affordability factors, which we’ll discuss later, lenders may factor in age requirements. With a residential mortgage, lenders often have a limit on the age a borrower will be when the full mortgage term is complete. This is when the full amount borrowed has been paid back (plus any interest accrued). For buy-to-let mortgages, upper age limits at the time of application may be in place, though some lenders take landlord experience into consideration with this. Some buy-to-let mortgage lenders may require applicants to be 21, where others may have a lower age limit of 18.
Additionally, residential mortgages are only available to individuals. Buy-to-let mortgages on the other hand can be applied for by both individuals and businesses.
Affordability criteria
Residential mortgage affordability criteria will take the applicant’s income into consideration as part of the wider affordability criteria. This is to ensure that mortgage payment obligations will be met. Required deposits for residential mortgages can be as low as 5% of the purchase price, giving a loan-to-value of 95%.
For buy-to-let properties, however, affordability is calculated based on projected monthly income from the rental property. Using a ‘stress test’, lenders look to ensure borrowers can afford around 125% of the projected rental income. The additional 25% is in place in case of emergency, and to cover mortgage payments between tenancies. This figure is used to determine how much can be borrowed on a buy-to-let mortgage. In terms of deposits, lenders often look for a loan-to-value of 75-80%. This requires a deposit of between 20% and 25%, significantly higher than the requirement for a residential mortgage.
Repayment types
One of the biggest differences between buy-to-let and residential mortgages is the repayment options. With residential mortgages, they are offered on a repayment basis. This means that with each monthly payment, a portion of the loan amount, along with accrued interest is paid. The loan value will reduce slightly each month.
Buy-to-let mortgages on the other hand are often offered as interest-only mortgages. This means that monthly payments will cover the accrued interest on the loan, but the loan amount will not reduce. At the end of the mortgage deal, the loan value will remain the same as it was before the deal began. This means that monthly payments are often lower than they would be on a repayment mortgage. Repayment buy-to-let mortgages are also available from some lenders.
Regulation
Most residential mortgage lenders are regulated by the Financial Conduct Authority*. This regulation is in place to protect the consumer. On the other hand, buy-to-let mortgages are not regulated in the same way.
Other considerations
Above we have detailed the differences between buy-to-let and residential mortgages. There are other things to consider when determining if purchasing a property to let out is right for you.
Tax implications
Any income earned from rental properties is subject to income tax. You will need to declare the income on a self-assessment form. If and when you come to sell the property, if the value of the property has increased, you may need to pay Capital Gains Tax* on the increased value.
Stamp duty
Assuming you are purchasing the let property as a residence in addition to your main residence, additional stamp duty will be due. Currently this is 5% above the standard rate, for properties over £40,000. You can find out more about changes to stamp duty this year, in our recent blog post.
Additional costs
You should factor additional costs to your let property purchase budget. These include buildings and contents insurance, landlord insurance, gas safety certification and an electrical installation condition report. You will also need to have funds to cover mortgage payments between tenants, as well as council tax for this duration, and other incidental bills.
How can Bell Mortgage Solutions help you?
Bell Mortgage Solutions works for our clients, not the bank. That means we work to ensure your requirements are front and centre when we find the right mortgage deal for you.
We work from a comprehensive panel which is representative of the whole of the market, including most major banks and building societies. We can secure mortgages for landlords with both first buy-to-let properties and portfolio landlords. Whatever your circumstances, we can help! Contact us to discuss your requirements.
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.
*Please be aware that by clicking onto the above link you are leaving the Bell Mortgage Solutions website. Please note that neither Bell Mortgage Solutions nor PRIMIS are responsible for the accuracy of the information contained within the linked site accessible from this page.
The information contained within was correct at the time of publication but is subject to change.
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