Buy to let mortgages

Our guide to understanding buy-to-let mortgages

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If you’re buying a property to rent out, you’ll need a buy-to-let mortgage. These differ from conventional mortgages you use to buy your own home, so it’s important to understand how they work...

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Your home may be repossessed if you do not keep up repayments on your mortgage

What is a buy-to-let mortgage?

A buy-to-let mortgage works differently to a residential mortgage on a property you’re planning to live in. You’ll need a bigger deposit, you’ll face higher fees and you’ll pay a higher rate of interest.

Buy-to-let mortgages are usually offered on an interest-only basis, which means the capital debt – the amount you’ve borrowed as a mortgage – will only be cleared at the end of the term. Most residential mortgages are capital and interest loans, where your monthly payments cover the interest and a portion of the debt, and the value of the loan plus interest is gradually paid back over the deal period.

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.

So a buy-to-let mortgage is then seen as a higher risk from the lender’s point of view, and a buy-to-let borrower then has to pay higher costs.

Buy-to-let mortgage loan size

All mortgages have a loan-to-value – LTV – figure, which is the size of the mortgage as a percentage of the value of the property.

With a normal residential mortgage, the LTV can be up to 100% - but a LTV of 90% or 95% is more common – and then the difference between the LTV and the asking price of the property and the total loan is made up of your deposit. So the deposit size could be as little as 5%.

But with a buy-to-let mortgage deal, most lenders will say you’ll need at least a 25% deposit to get a mortgage.

This means the difference they loan you is less, so your LTV is less, and it protects the lender in case you default on your mortgage repayments because of problems with collecting rent.

The greater the deposit you can put towards the purchase, the lower your monthly mortgage repayments are likely to be.

Although the average loan-to-value ratio is lower for a buy-to-let purchase than a residential mortgage, you’ll need to factor in the larger capital cost at the end of the mortgage to pay off the value of the house. 

A graphic showing the average loan to value for buy-to-let purchases is less than the average loan to value for first time buyers

The average LTV consumers are looking to take out for a buy-to-let property is less than the average LTV for first time buyers, according to MoneySuperMarket data from January 2016 – July 2018.

Average buy-to-let purchase price

The average purchase price for a buy-to-let property from 2016 – 2018 was £183,278, compared to £272,425.00 for a residential purchase property.

This suggests prospective landlords might be looking for less expensive properties because they need to find 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. 

A graphic showing the average purchase price for a buy-to-let property

The average purchase price for a buy-to-let property is £183.278, according to MoneySuperMarket data from mortgage quote searches from January 2016 – July 2018.

Buy-to-let mortgage rates

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 repayments increases, and if interest rates decrease, then your monthly mortgage repayments decrease.
  • Discounted variable mortgages: lenders have a standard variable interest rate or SVR, which might be set at a rate of 5%, for example. A discounted variable rate mortgage will have a rate that is always a set amount below the SVR - perhaps 2% lower, so the discounted mortgage rate would then be 3%. If the SVR moves, the discounted rate will follow it up or down with the discount remaining in place. So if the SVR here rose to 6%, the discounted rate would be 4%. Discounted rate deals usually last two years, and you’ll then move onto the lender’s SVR.
  • Fixed-rate mortgages: a fixed rate mortgage can help to keep your monthly mortgage repayments at a low rate for two, three or five years. How low those payments will be depends on the deals mortgage providers are offering when you’re looking to 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 to do at the end of your interest-only mortgage deal

You’ll still have to pay off the cost of the property purchase price at the end of the deal, as you’ll only have been paying back the interest. You might decide to do this by selling the property.

If you decide to sell the property then house prices would need to have risen, or they’d at least need to be the same for you to be able to pay back what you owe towards the property value. If house prices have fallen when the time comes to sell, you’ll still need to make up the loss on the price you paid for it.  

Landlord fees

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 for landlord fees like landlord’s insurance, rent insurance, letting agent fees – if you choose to use them – and more. Our landlord regulations and landlord responsibilities pages have more information on the costs involved in buying a property to let, so you’re aware of what you’ll need to pay for before progressing with a mortgage application.

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 how much the buy-to-let monthly mortgage repayments might cost you. Enter how much of a loan you’ll need and how much the property you’re looking to buy is valued at 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 – max LTV – the lender would be prepared to offer you, helping you to see 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 more of a deposit.

Buy-to-let mortgage quotes can help you when you first start thinking about whether or not 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. An agreement in principle and then a mortgage offer will also look at your credit history and financial situation, so this 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.

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