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Buy-to-let mortgages

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Buy-to-let mortgages explained

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 a new property, most lenders will prefer you not to finance your purchase with a standard residential mortgage.

Who are buy-to-let mortgages for?

Buy-to-let mortgages are powerful tools both for seasoned investors and for new landlords looking to take their first steps into the rental property market. Not everyone is entitled to take one out though: BTL mortgages are more expensive than typical mortgages, and require deposits of between 25% and 40%.

How does a buy-to-let mortgage work?

Most borrowers take out an interest-only mortgage for their chosen property. They then only pay the interest on the loan as it accrues every month, generally from the proceeds of the rent they collect. The capital debt – the full amount of the mortgage – is paid at the end of an agreed term.

What are the criteria for a buy-to-let mortgage?

Finding a buy-to-let mortgage with MoneySuperMarket couldn’t be easier, but here’s what you need to bear in mind:

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Are buy-to-let mortgages interest-only?

Most BTL borrowers prefer to take out interest-only mortgages, because they mean lower outgoings. Repayment mortgages are also available, and are becoming a popular alternative

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How much can you borrow?

How much you can borrow will depend on your deposit, personal circumstances and rental income. Lenders normally require you to earn more in rent every month than you repay on your mortgage

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Are buy-to-let mortgages more expensive?

Landlords seek out cheaper properties, but BTL mortgages cost more – both in higher interest rates and larger deposits – as borrowers are more of a risk to lenders than owner-occupiers

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What are the tax implications of buy-to-let mortgages?

The once-generous tax allowances for BTL mortgages have changed, but borrowers are still entitled to a 20% credit on their interest payments. Some choose to set up limited companies, so specialist advice is encouraged

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What is the difference between a buy-to-let mortgage and a residential mortgage?

Unlike most residential mortgages, buy-to-let mortgages are commonly 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 unless you choose to make extra payments or take out a repayment mortgage.

You will need to pay the capital debt off 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 normally requires a larger deposit than a residential mortgage. You may face larger upfront fees and pay a higher rate of interest. You will have to pay more stamp duty for a second property that is not your main home. Some buy-to-let investors choose to set themselves up as limited companies for taxation purposes. 

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%.

You need a larger deposit for a buy-to-let mortgage because it protects the lender in the event that you default on your payments, which usually happens as a result of problems with collecting rent.

How much does a buy-to-let property cost?

The average value for a buy-to-let property in January 2020 was £165,247, compared with an average of £274,773 for residential home movers, according to MoneySuperMarket mortgage search data. This suggests prospective landlords are looking for less expensive properties where rental values provide a reasonable rate of return.

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.

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 may need to factor into your budgeting when deciding whether or not you can afford a mortgage.

These include the following:

  • Stamp duty, surveyors’ fees and other charges when buying
  • Tax on rental income
  • Building and landlords’ insurance
  • Rent insurance (optional)
  • Letting agents’ fees, if you choose to use them
  • Maintenance and repairs for the property, or possibly ground rent

It’s worth investigating landlord regulations and landlord responsibilities to find out more about the costs involved in buying a property to let.

What happens at the end of my interest-only buy-to-let mortgage?

Because you only pay interest on a buy-to-let deal, you’ll need to repay the full value of your mortgage at the end of your term. You may be able to extend your mortgage, or you might decide to sell 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.

What types of mortgage can I take out?

You’ll likely find the same options as if you were taking out a first mortgage when remortgaging. The most common remortgage deals include:

Remortgaging with a fixed rate deal

A fixed rate mortgage is when the interest rate stays the same for a set amount of time. This can be a good option if you want peace of mind that your repayments will stay the same each month. Most fixed rate deals run for between two and five years, although some are longer.

Fixed rate mortgages are the most popular mortgage type for people looking to remortgage, according to MoneySuperMarket mortgage comparison quote searches from January 2016 – July 2018.

A graph showing that 94% of people looking to remortgage are looking for a fixed rate mortgage

Remortgaging with a tracker deal

Tracker mortgages have variable rates that track the Bank of England base rate at a set percentage above or below it.

If the Bank of England’s base rate rises or falls, the interest you pay on your monthly mortgage repayments will do the same. This can be good when rates are falling, but you’ll need to be sure you could afford your repayments if rates went up.

70% of consumers looking for a tracker mortgage are remortgaging, according to MoneySuperMarket data January 2016 – July 2018.

A graph showing the breakdown of borrowing types for tracker mortgages

Other mortgage types to consider

Other mortgage types you might want to consider if you’re looking to remortgage include:

  • Capped rate mortgage: a capped rate mortgage is a variable rate mortgage, but there is a limit to how high the rate can go. This can be useful if you want a variable rate mortgage, but also want to avoid unaffordable payments if the rate rises.
  • Discounted mortgage: a discounted mortgage is another type of variable rate mortgage which offers a discounted rate on the lender’s SVR for a certain period of time.
  • Offset mortgage: an offset mortgage helps to reduce the overall interest you pay by offsetting your savings against the outstanding balance of your mortgage. But this does mean you won’t be gaining any interest on your savings during the deal.

 

Fixed rate mortgages

Fixed rate mortgages have an interest rate that stays the same for a set period. This could be anything from two to 10 years. Your repayments are the same every month and you don't need to fear fluctuations in interest rates. Most will charge you a penalty - known as an early repayment charge (ERC) - if you choose to leave the deal before the end of the fixed term.

Variable rate mortgages

Interest rates adjust periodically with a variable rate mortgage, which means repayments may change throughout the loan term. Usually, the interest rate changes in relation to another rate - the Bank of England's base rate is very influential on variable interest rates, as is the base rate of each lender.

For standard variable rate (SVR) mortgages, each lender has an SVR that they can move when they like. In reality, this tends to roughly follow the Bank of England's base rate movements. SVRs can be anything from two to five percentage points above the base rate – or higher – and they can vary massively between lenders.

Discounted variable rate mortgage

The other type of variable mortgage is a discount mortgage. Rather than being linked to the Bank of England base rate, discounts are linked to the lender's standard variable rate (SVR). For example, if the SVR is 4.50% with a discount of 1%, the payable mortgage rate is 3.50%. If the SVR rose to 5.50%, the pay rate would rise to 4.50%.

The problem with discounts is that SVR changes are at the lender's discretion so your mortgage payments could change even if there has been no alteration in the Bank of England base rate. What's more, even if the SVR changes following a move in the base rate, there is no guarantee that it will increase or decrease by the same amount.

As a result, trackers are usually seen as more transparent than discounted deals and are often seen as being fairer for the borrower.

When the base rate fell from 5.00% to 0.50% between October 2008 and March 2009, for example, Lloyds TSB was the only top 20 lender to reduce its SVR by the full 4.50%. All the others cut their rates by less.

When the Bank of England raised the base rate from 0.25% to 0.5% in November 2017, anyone who wasn’t on a fixed rate mortgage was at risk of seeing their repayments increase. A number of leading mortgage lenders followed and increased their tracker and/or SVR rates a month later.

Mortgage fees explained

Most mortgage deals carry arrangement fees, which can vary from a few hundred pounds up to a couple of thousand.

Also bear in mind that these set up costs can sometimes be made up of two fees. An increasing number of lenders charge a non-refundable booking fee, which is effectively a product reservation fee. If your house purchase falls through and you don’t end up taking the mortgage deal, you won’t get this fee back.

The second type of fee is an arrangement fee which you pay on completion of the mortgage so you won't have to pay it if, for any reason, you don't take the mortgage.

Mortgage overpayment

Calculate how early you could pay off your mortgage. But make sure you read our mortgage overpayment guide first, as overpaying isn’t the right move for all homeowners.

Mortgage overpayment calculator

Consider the fees

Remember to always factor these into the overall cost of any deal. Even if a lender is offering a seemingly unbeatable rate, steep fees could mean that it actually works out to be more cost-effective to opt for a higher rate, but with a much lower fee, or no fee at all.

The best mortgage rate for you depends on how much you are looking to borrow. A high fee is often worth paying in order to secure a low interest rate if you are applying for a large mortgage. But those with smaller mortgages could be better off opting for a higher rate and lower fee.

However, while this is the general rule, it is well worth crunching the numbers when you are comparing mortgages - you need to work out the total cost over the term of the deal. For example, if you are going for a two-year fix you need to work out the cost of your repayments over the term. You can do this by finding out what the monthly payment will be using our mortgage calculator – and then multiply by 24. You then need to add on the arrangement fee to find out the total cost.

Credit history

You will likely find that you have more mortgage deals available to choose from if you have a good credit history, so it’s worth making sure that your credit report is as good as it can be before applying for a mortgage. Steps like paying off any outstanding borrowed credit you owe and making sure your current address is on the electoral role can help to improve your credit score.

Save a deposit

The more money you can save as a deposit, the less you’ll need to borrow as a mortgage loan – and having a bigger deposit can help you get access to more competitive mortgage rates. Lenders will often have a maximum loan to value they’re prepared to offer you, and the rest will need to be made up with either a deposit or an equity loan like the government’s Help to Buy equity loan scheme.

Compare mortgage deals

Using a mortgage comparison tool can help to give you a better idea of how much you’d need to pay in monthly costs and interest, the duration of the deal, the maximum LTV and any product fees you may need to pay for the mortgage deals available based on your borrowing requirements. It’s important to remember though that the actual mortgage deals you’re offered when you go to make an application may differ because they will then be influenced by your financial situation and credit history.

Looking for mortgage advice?

Get free mortgage advice, and see deals from the whole of the market, with broker London & Country. Call free from your landline or mobile on 0800 170 1943 any day.

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