What is a buy-to-let mortgage?
A buy-to-let mortgage is a mortgage sold specifically to people who buy property as an investment, rather than as a place to live. If you plan to rent out your property, you won’t be able to finance your purchase with a standard residential mortgage.
What is the difference between a buy-to-let mortgage and a residential mortgage?
Unlike most residential mortgages, buy-to-let mortgages are usually offered on an interest-only basis. This means that your monthly payments will only cover the interest on your mortgage. Your capital debt – the money you’ve borrowed – will not go down.
You will need to pay off this amount in full at the end of your term. You could do this by selling the property, or you could keep the property and take out another mortgage.
A buy-to-let mortgage requires a larger deposit than a residential mortgage. You’ll face larger fees and pay a higher rate of interest, and you will have to pay more stamp duty for any property that is not your main home.
Why are buy-to-let mortgages more expensive?
Buy-to-let mortgages involve higher interest rates and larger fees because they’re a greater risk for the lender. Landlords with a buy-to-let mortgage usually expect their monthly mortgage payments to be covered by the rent they receive. But some months there may be problems with rent collection, and other months there might not be any tenants living in the house and paying rent.
However, because your monthly payments will only cover the interest on your mortgage, you may pay less each month than you would for a residential mortgage.
What deposit do I need for a buy-to-let mortgage?
Most lenders will require you to put down a larger deposit for a buy-to-let mortgage. This is usually around 25% of the property’s value, but your mortgage may require a deposit as large as 40%.
A larger deposit is required for a buy-to-let mortgage because it protects the lender in case you default on your payments due to problems with collecting rent.
There are benefits and drawbacks to putting down a larger deposit. While the upfront costs are higher, paying more initially will lower your monthly costs, and also reduces the amount you will have to pay off or refinance at the end of your mortgage.
How much does a buy-to-let property cost?
The average purchase price for a buy-to-let property in 2019 was £122,786, compared with an average of £226,709 for a residential property.
This suggests prospective landlords are looking for less expensive properties, as they need a bigger deposit to get a buy-to-let loan.
The type of property they’re looking to buy might also be cheaper if they’re looking for more flexible accommodation that’s attractive to people looking to rent.
What are the interest rates for a buy-to-let mortgage?
The interest rate you pay on your buy-to-let mortgage will depend on the total amount you borrow, your general financial situation, how much rental income you’re expecting to get, and the type of mortgage you choose to take out.
There are various types of buy-to-let mortgage on offer:
Tracker mortgages: With a tracker mortgage, a lender will set the interest rate they charge at a certain percentage above the Bank of England’s base rate – which can change. This means that your mortgage repayments can also change month-to-month, depending on the base rate. If interest rates increase, then the cost of your monthly mortgage payments goes up, and if interest rates decrease, your monthly mortgage payments go down.
Discounted variable mortgages: A discounted variable mortgage is fixed at a set percentage below your lender’s standard variable rate. A discount of 2% on a standard variable rate of 5% means that you will pay 3% interest on your mortgage, but if your lender’s standard variable rate goes up to 6%, your discounted rate will be 4%. Discounted rate deals usually last two years, and you’ll then move onto the lender’s standard variable rate.
Fixed-rate mortgages: A fixed-rate mortgage can help to keep your monthly mortgage repayments at a low rate for two, three, five or 10 years. How low those payments are depends on the deals mortgage providers are offering when you take out a loan. At the end of the fixed-rate period deal, you’ll be moved onto the provider’s standard variable rate – which can be higher – so this is when you can then look for a new deal.
What happens at the end of my interest-only buy-to-let mortgage?
Because you only pay interest on a buy-to-let deal, at the end of your term you’ll need to repay the full value of your mortgage. You may be able to extend your mortgage, or you might decide to do this by selling the property.
If you choose to sell, you’ll be able to make a further profit if house prices have risen since you took out your mortgage. However, if house prices fall you’ll still need to pay off the rest of the mortgage yourself.
Who can get a buy-to-let mortgage?
Because buy-to-let mortgages are riskier for lenders, they have stricter requirements for who can get a buy-to-let mortgage. It’s usually necessary for you to already have an income of £25,000 a year, and lenders will also check your existing debts and your credit record.
Some lenders also have maximum age limits, based on when the mortgage ends. This is usually around 70 or 75, so if you’re 60 years old you may not be able to take out a 25-year mortgage.
What fees will I need to pay on a buy-to-let property?
If you are planning on buying a property to let out, there will be other fees that you’ll need to factor into your budgeting when deciding whether or not you can afford a mortgage.
You’ll need to pay tax on your rental income, as well as paying landlord’s insurance, rent insurance and letting agent fees – if you choose to use them. You will also be responsible for maintenance and repairs.
Can I get tax relief for a buy-to-let mortgage?
Before 2017, landlords could deduct the interest they paid on their buy-to-let mortgages from their taxes. This tax relief is slowly being phased out, and from April 2020 mortgage interest will no longer be deductible. However, you will be able to claim for a 20% tax credit on the interest you pay.
Find your best buy-to-let mortgage
You can compare buy-to-let mortgages with MoneySuperMarket’s mortgage comparison tool to help you get a better idea of what your monthly costs might be. Enter the value of the loan you’ll need and the price of the property you’re looking to buy to compare buy-to-let mortgage quotes. You can also filter by ‘interest only’ and ‘capital and interest’ to see how this affects monthly repayment costs.
Each quote will also show the maximum loan-to-value rate – the size of the mortgage as a percentage of the value of the property – that the lender would be prepared to offer you. This way, you’ll know whether or not you’d be able to afford taking out a mortgage on a second property, or whether you’d need to save up for a larger deposit.
Buy-to-let mortgage quotes can help you when you first start thinking about whether you’re ready to purchase a rental property, but you’ll still need to get an agreement in principle – and then a firm mortgage offer – to know if you can take out a buy-to-let mortgage, and at what interest rate.
This will require lenders to look at your credit history and financial situation, and it may affect the mortgage rate you’re officially offered – and whether you’ll be able to take out a buy-to-let mortgage at all.