A guide to understanding buy-to-let mortgages

A guide to understanding buy-to-let mortgages

If you’re buying a property to rent out, you must get a buy-to-let mortgage. Many existing landlords will already know that this market has shrunk noticeably over the last few years, but there are still mortgages out there.


Buy-to-let property has become a more attractive investment option due to low savings rates and somewhat volatile stock market fluctuations. Furthermore, the increasing demand for rental properties in certain parts of the UK has made being a landlord an appealing source of growing income.

If you’re buying a property to let, the first hurdle is to make sure you get the right type of mortgage. Get it wrong, and you’ll be committing fraud.

What is a buy-to-let mortgage?

A buy-to-let mortgage allows you to borrow money to purchase a property that you can then rent out. Buy-to-let mortgages are offered by a number of banks and buildings societies and are traditionally more expensive than a standard residential mortgage because they are considered a higher risk.

If you have a residential mortgage and you rent out your property without the bank’s knowledge, you could find yourself committing mortgage fraud.

Bigger deposit for buy-to-let

If you want to take out a buy-to-let mortgage, you’ll need a higher deposit than you’d need for a residential mortgage. You can expect to put down at least 25% as a deposit, although many of the best buy-to-let mortgage deals require a 40% deposit.

The average deposit for a buy-to-let mortgage in the 2016/17 financial year was £62,309, which is over 50% more than a first-time buyer deposit of £39,708. That’s according to MoneySuperMarket data.

Buy-to-let mortgage rates

Buy-to-let mortgage rates vary, and similarly to any other type of mortgage, are dependent on a number of factors including how risky the loan is, how much deposit is put down and how strong your credit score is.

The rates of buy-to-let mortgages are often higher than residential mortgages. Banks and building societies charge higher rates for buy-to-let properties because they present a greater risk to the lender.

This also means that the amount you can borrow when compared to the price of the property is lower with a buy-to-let mortgage. The loan-to-value ratio of a first time buyer’s mortgage in 2016/17 was 84%, meaning they borrowed 84% of the property’s value. For buy-to-let purchases, the ratio was just was 69%.

Rental income

Buy-to-let mortgages are only issued when a bank or building society thinks they are affordable. This is judged by an affordability calculator that weights up your personal income and the expected rental income against the value of the property. Most lenders will insist that the annual rental income must equal at least 125% of the annual mortgage repayments.

So, if you are repaying £15,000 a year, your rental income should be at least £18,750. If your mortgage repayments were £20,000, you’d be looking for rental income of £25,000 or more.

The strict conditions reflect the greater risk of buy-to-let loans, as statistics show that borrowers are more likely to default on a buy-to-let than a residential mortgage. The required rental income buffer on top of the mortgage interest due is also there to allow for a period of vacancy between tenants.

Do you qualify for a buy-to-let mortgage?

There is usually a list of other eligibility criteria for buy-to-let mortgages. Most banks and building societies insist on a minimum age, often 25, plus a minimum income, usually around £25,000.

You’re not normally allowed to take out more than three buy-to-let loans and there will be a cap on the total amount you can borrow, though it could be £2 million or more.

However, data shows that value of buy-to-let properties tend to be a lot lower than for first-time purchases. In 2016/17 the average buy-to-let property was worth £30,000 less than the average first-time buyers’ home.

Choice of mortgage deals

You can usually choose between a range of mortgage deals, including fixed rate and tracker loans. Arrangement fees also apply – and they can be high, typically more than £1,000.

Many landlords prefer a fixed-rate mortgage so that they can budget with more certainty. But tracker loans are often cheaper, if you are happy to cope with fluctuations in the cost of your mortgage.

Interest-only mortgages

Most buy-to-let loans are interest only, not repayment. In other words, you pay only the interest each month and clear the capital debt when the property is sold. There are several advantages to an interest-only loan if you are buying a property to let.

Interest-only monthly payments are cheaper than a repayment mortgage – £360 on average, less than half of what you’d pay for a first-time buyer’s residential mortgage of £770 each month. That’s according to MoneySuperMarket data for the 2016/17 financial year.

Secondly, you can usually offset a percentage of the mortgage interest against your tax bill.

Of course, the downside is that these repayments don’t pay off any of the capital. This can be especially tricky if house prices are flat or falling, as it increases the risk of selling the property and not having enough capital to repay the mortgage.

Make sure you can afford it

There are many risks involved with buy-to-let investments, therefore you have to be confident that you can cope if your property is empty for any period, or if tenants prove to be unreliable.

You also have to make sure the sums add up, bearing in mind that both rents and house prices could come down, leaving you with a large interest payment to make each month.


The figures and information provided by this guide are for illustration purposes only. All data was sourced from MoneySuperMarket/London & Country in the 2016/17 financial year and, unless stated otherwise, compares buy-to-let interest-only mortgages with first-time buyer repayment mortgages.



Guide To Buy To Let Mortgages | MoneySuperMarket



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*The information provided in this section of our website is for information purposes only. The website and its content are not and should not be deemed to be an offer of or invitation to engage in any investment activity. The website should not be construed as advice or a personal recommendation by Captec Investments to any prospective investor.