Explained: The Buy-To-Let Mortgage

With the UK’s property investment industry growing quickly over the last 30 years, buy-to-let mortgages have become a popular product offered by several high-street banks.

The ability to finance a purchase using a mortgage has allowed a wider range of investors to enter the market, with deposit requirements usually around the 20-25% mark. In fact, studies suggest that buy-to-let properties accounted for 10% of homes bought in the first quarter of 2022 (source).

But there’s a lot of confusion about buy-to-let mortgages, especially amongst first-time investors. We work with new and experienced investors every day, and questions about mortgages are some of the most common.

So, in this guide, we’ll lay it all out. We’ll explain what a buy-to-let mortgage is, how it differs from a standard mortgage, whether you need one, and more. And, once you’re done reading, why not listen to our founders (and experienced property investors), Nick and Tobi, as they discuss the merits of buy-to-let mortgages on their Pure Property podcast:

What is a buy-to-let mortgage?

A buy-to-let (BTL) mortgage is a type of loan that’s designed for property buyers who intend to let their purchased property rather than live in it. So if you’re planning to purchase a house or a flat and let it out to tenants, you’ll need to apply for a buy-to-let mortgage rather than a conventional residential mortgage.

However, things are a bit different for a BTL mortgage. The deposit you need to put down is typically larger, and the interest rates are sometimes higher compared to a standard mortgage.

And don’t forget about the various responsibilities you’ll have as a landlord. It’s not all about raking in the rent; it’s also about keeping your tenants happy and your property in tip-top shape.

What are the differences between repayment and interest-only mortgages?

Most buy-to-let mortgages in the UK are interest-only mortgages. This means that the individual only pays the interest on the loan each month, rather than paying capital and interest, which is how a repayment mortgage works.

The repayment method means you slowly build equity with each payment, but with an interest-only mortgage, you are simply servicing the debt (i.e. you don’t own any more equity in the property). If you take out an interest-only BTL mortgage, you’ll need to pay the full loan amount back either at the end of the term or when you sell.

Still, interest-only tends to be more popular among investors because monthly mortgage payments are lower, which enables landlords to maximise profits and keep overheads relatively low. They’re also betting on the property’s value growing before they sell, creating a substantial profit margin after they’ve repaid the loan.

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

Lenders view buy-to-let mortgages as riskier than traditional ones, so they tend to require a larger deposit. In most cases, you’ll need a minimum deposit of 25% of the property value, but some lenders will ask for an even bigger deposit – possibly up to 40%.

It’s a chunky amount, but remember, this is an investment. You’ll own far more equity in the property as a result and that stands you in good stead for a potential sale further down the line. Plus, if you can cough up a larger deposit, it’s worth considering as you’ll unlock lower mortgage interest rates, which means lower monthly repayments and increased profitability from rental income.

Before you start counting your pennies, bear in mind that the deposit isn’t the only expense you’ll encounter. There are also reservation fees (if you’re buying off-plan), solicitor costs, and let’s not forget about stamp duty. It’s crucial to factor in all these costs when figuring out how much capital you need to start.

Who is eligible for a BTL mortgage?

If you plan to buy a property and let it out to tenants, you will need to apply for a BTL mortgage. There are strict qualifying criteria in place, though. The exact terms will vary according to the lender, but most mortgage providers only offer loans to applicants who meet the following eligibility rules:

  • A high credit score and good credit history
  • Evidence of employment or self-employment earnings, not including income from rental properties
  • Homeownership – some lenders will only approve BTL mortgages for applicants who own their home
  • Age restrictions – most lenders have a maximum age limit of 75
  • A 25% deposit
  • Expected monthly rental income and average yield – the loan value will depend on the expected rental fee

Can I switch from a residential mortgage to a BTL mortgage?

It is possible to switch from a residential mortgage to a buy-to-let mortgage, but the decision will depend on the individual lender. If your current mortgage provider rejects the application, you could remortgage the property with a new lender. However, it’s worth keeping in mind that you may have to pay charges for early repayment.

It is also viable to switch from a BTL mortgage to a residential mortgage if you choose to live in a property you’ve rented out in the past. Residential mortgage rates tend to be lower, so swapping your mortgage could save you money.

How many buy-to-let mortgages can I have?

In theory, there are no restrictions in terms of how many buy-to-let mortgages you can have, but some lenders may put a limit on how much they will lend to an individual. This means that landlords or investors who have multiple mortgages may spread them across different providers.

Does having a buy-to-let mortgage affect getting a residential mortgage?

If you have a buy-to-let mortgage, you can still get a residential mortgage. As long as you’re up to date with monthly payments and you meet the criteria, lenders should approve your mortgage application. Residential mortgage rates and deposits are usually lower than BTL mortgages.

However, your application for a residential mortgage may be rejected if you’ve fallen behind with your BTL mortgage payments or your income isn’t sufficient to cover both mortgages.

Can a company get a buy-to-let mortgage?

Yes, a company can get a buy-to-let mortgage. It’s known in the industry as a limited company buy-to-let mortgage. Bit of a mouthful, but stay with us.

This option has become more popular recently due to tax changes. It can now be more tax-efficient to invest in properties through a limited company structure rather than personally. The company pays corporation tax on its profits, which might just be lower than the income tax you’d personally pay on your rental income. Plus, it can claim expenses to offset tax liabilities that personal owners cannot.

But, be aware that company buy-to-let mortgages tend to come with slightly higher interest rates and fees. The application process can also be a tad more complex, with lenders peeking into the company’s financial health, the experience of its directors, and the nature of its business activities.

If you’re considering going down the company ownership route, we highly recommend sitting down with a financial advisor with a knack for property investment to make sure you get it right. You don’t want to make a costly mistake that comes back to bite you in the future.

Can you claim mortgage interest on a buy-to-let?

Whether or not you can claim the cost of mortgage interest payments as a tax-deductible expense depends on the property’s ownership structure.

Since 2020, landlords who personally own a property have been unable to claim mortgage interest as a a tax-deductible expense. Instead of claiming interest from rental income, property owners can now access a tax credit, which represents 20% of the interest portion of the mortgage payment. The change in taxation means that most landlords will pay more tax.

Meanwhile, for properties owned through a company, interest payments can be claimed as a business expense and, therefore, used to reduce corporation tax.

Can I use a normal mortgage for a buy-to-let?

You’re not typically allowed to use a standard residential mortgage for a buy-to-let property.

A “normal” mortgage is designed for properties that you intend to live in, not for those you plan to rent out. As such, lenders calculate the risks and interest rates for these mortgages based on that assumption.

For long-term letting, a specialist buy-to-let mortgage is the way to go. There are different interest rates, terms, and conditions that better align with property investment.

If you take out a standard mortgage but then use the property as a buy-to-let, you may be in breach of the mortgage terms – a scenario you definitely want to avoid.

But what if you bought the property as your primary home initially and rightly took out a standard mortgage, and now you want to rent it out?

Fortunately, many lenders offer a “consent to let”, which allows you to rent out your property for a short period under your existing mortgage. But, this isn’t a permanent solution and is subject to approval from your lender.

So if you’ve decided to rent the property out long-term, you may need to convert to a BTL mortgage. But before you make any hasty decisions, take a breather and have a chat with your lender. You may also want to speak to an independent mortgage advisor for some personalised advice.

Conclusion

Buy-to-let mortgages are complex financial products. Hopefully, with the help of this guide, you now understand them a bit better.

There are key differences to a standard mortgage, particularly when it comes to eligibility criteria, repayment methods and deposit values, so we suggest exploring your options, comparing offers and seeking advice before making any decisions.

And remember, each investment journey is unique. While the principles might be the same, your personal circumstances, goals, and the property market’s state will influence the decisions you make. Take the time to digest this information, consult with specialist advisors, and listen to experienced voices in the field (like our Pure Property podcast!).

Knowledge is your most valuable asset, and armed with it, you’re well on your way to making informed and savvy property investment decisions. Happy investing!

For more help with property investment, feel free to get in touch with our friendly team. Track Capital is a leading investment consultancy specialising in buy-to-let property. We’re here to help you source exceptional property investment opportunities in an ethical manner, at no extra cost.

Whether you’re an experienced or first-time investor weighing up your options, speak to our team by filling out the form below or emailing [email protected].

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