Buy-to-let (BTL) mortgages are for landlords who buy property to rent it out. The rules around buy-to-let mortgages are similar to those around regular mortgages, but there are some key differences. Read on for more information about how they work, how to get one and what mistakes to avoid.
You can get a buy-to-let mortgage if:
- You want to invest in houses or flats
- You can afford to take a risk: investing in property is risky, so you shouldn’t take out a BTL mortgage if you can’t afford to take the risk.
- You already own your own home, whether outright or with an outstanding mortgage, you’ll struggle to get a buy-to-let mortgage
- You have a good credit record: and aren’t stretched too much on your other borrowings. E.g your existing mortgage and credit cards
- You earn £25,000+ a year: otherwise, you might struggle to get a lender to approve your buy-to-let mortgage
- You’re under a certain age: lenders have 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’re 45 when you take out a 25-year mortgage it will finish when you’re 70.
Buy-to-let mortgages are a lot like ordinary mortgages, but with some key differences:
- The fees tend to be much higher.
- Interest rates on buy-to-let mortgages are usually higher.
- The minimum deposit for a buy-to-let mortgage is usually 25% of the property’s value (although it can vary between 20-40%).
- Most BTL mortgages are interest-only. This means you don’t pay anything each month, but at the end of the mortgage term, you repay the capital in full.
- Most BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA). There are exceptions, for example, if you wish to let the property to a close family member (e.g. spouse, civil partner, child, grandparent, parent or sibling). These are often referred to as a consumer buy to let mortgages and are assessed according to the same strict affordability rules as a residential mortgage.
Remember if you’re taking out a BTL mortgage from an FCA authorised lender, they are expected to treat you fairly.
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 25–30% higher than your mortgage payment.
To find out what your rent might be, talk to local letting agents, or check the local press and online to find out how much similar properties are rented for.
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.
Don’t assume your property will always have tenants.
There will almost certainly be ‘voids’ when the property is unoccupied, or rent isn’t paid, and you’ll need to have a financial ‘cushion’ to meet your mortgage payments.
When you do have rent coming in, use some of it to top up your savings account.
You might also need savings for major repair bills. For example, the boiler might break down, or there might be a blocked drain.
Stamp Duty Land Tax (SDLT) for buy to let properties is an extra 3% on top of the current SDLT rate bands for properties above £40,000.
Don’t fall into the trap of assuming you’ll be able to sell the property to repay the mortgage.
If house prices fall, you might not be able to sell for as much as you had hoped.
If this happens, you’ll be left to make up the difference on the mortgage.
If you sell your buy-to-let property for profit, you will pay Capital Gains Tax if your gain exceeds the annual Capital Gains Tax.
Also, rental income exceeding your mortgage interest payments and certain allowable expenses are liable to Income Tax.