What is a buy-to-let mortgage and how can I get one?

Buying a property with a buy-to-let mortgage means you benefit from a regular rental income and an investment for the future.

If you want to become a landlord, it’s useful to understand what a buy-to-let mortgage is and how it works.

There are also a few things to consider before you decide if property investment is the right route for you.

What is a buy-to-let mortgage?

If you buy a property to rent out, you won't be able to buy it with a traditional residential mortgage.

Instead, you'll need a specialist buy-to-let mortgage designed for people who buy a property to rent to tenants rather than a place to live. It should be viewed as a mid to long-term investment.

The rules around buy-to-let mortgages are similar to those for regular mortgages, but there are key differences around lending criteria, eligibility and affordability.

How does a buy-to-let mortgage work?

There are many reasons why people buy more property, whether it's a buy-to-let, holiday let or second home.

A key decision is whether to choose a repayment or interest-only mortgage.

You can get various types of buy-to-let mortgages, such as a fixed, variable, tracker, discount or capped interest rate. However, most buy-to-let mortgages are interest-only.

Interest-only buy-to-let mortgages

Monthly payments are generally cheaper compared to a repayment mortgage. 

In the short term, this can reduce your monthly outgoings, but once your deal ends, you'll have to pay off the cost of the property at the time you bought it. 

Most landlords do this by selling their property at a profit although it might not be that simple. 

If house prices fall and the property is worth less than what you paid, you'll have to use your money to pay off the remaining debt. 

That's why it's vital to have a long-term plan to pay off the loan or refinance it at the end of your mortgage term. 

Repayment buy-to-let mortgage

With a repayment mortgage, you'll pay off the full amount you borrowed by the end of the term, so you can then: 

• Keep the property, continue renting it out and have all the income 

• Sell it and keep the full sale amount 

A repayment mortgage costs more per month, so it may only be suitable if you can charge enough rent to cover it. 

How much deposit do I need to get a buy-to-let mortgage?

The minimum deposit for a buy-to-let mortgage can vary. It's usually 25% of the property's value, but could be between 20% to 40%.

So, for a property that's £250,000, you'll be expected to put down anywhere between £50,000 (20%), £62,500 (25%) and £100,000 (40%).

How much can I borrow on a buy-to-let mortgage?

The maximum you can borrow depends on the amount of rental income you expect.

To get an idea of how much rent you can charge, speak to a local letting agent to see how much similar properties are being rented out for.

Moneyfacts has a buy-to-let calculator that works out expected rental yield so you can see what return you might get before you apply for a buy-to-let mortgage.

For example, if a property is valued at £175,000 and you charge a monthly rent of £895, your expected yield would be 6.14%.

Lenders will look at how much rental income you'll get from the property and compare this to your monthly mortgage repayments.

The rental income will usually need to be at least 125% of your mortgage repayment. So, if your monthly interest payments are £600, you'll need to charge at least £750 a month in rent.

Generally, the more you're able to charge in rent, the higher the loan you could be eligible for.

What are the lending criteria for a buy-to-let mortgage, and who can get one?

There are many rules regarding lending criteria you'll need to become familiar with, including:

Eligibility

• Owning your own home outright or with an outstanding mortgage
• Having a good credit record
• Earning at least £25,000 a year
• Being under a certain age. Lenders have upper age limits, which is usually that you'll be no older than 75 when the mortgage ends, but these limits can vary by lender.

First time buyers

For first-time buyers priced out of the market in their local or desired area, buying a property elsewhere and renting it out could be a way to get onto the property market.

You can use Unbiased’s mortgage calculator to discover how much you could borrow and how much it might cost a month.

There are many things to consider, including: 

• To get a good deal, you may need a bigger deposit as the available mortgages will be significantly less.
• You'll be giving up some benefits available to first-time buyers, such as stamp duty. As you won't be living in your first property, you won't qualify for first-time buyer relief.
• If you buy a property to live in while keeping your buy-to-let property, you'll have to pay the full second home surcharge.
• You may find it more difficult to get a mortgage when you buy your first home to live in as lenders will assess any debt you have outstanding on your buy-to-let mortgage.

Second homes

If you're buying a property to be used as your own holiday home, you'll need a residential second home mortgage.

However, if you plan to let it out to generate income, you'll need a special holiday let mortgage.

Unbiased can connect you to a qualified mortgage broker who can help you find the right deal.

House in Multiple Occupation

You can generally make a greater profit from a house in multiple occupation (HMO), which is a house occupied by at least three people who you share toilet, bathroom or kitchen facilities with.

To do this, you'll need a specialist HMO mortgage.

How is a buy-to-let mortgage different from a residential one?

It's usually cheaper to get a residential mortgage than a buy-to-let one. This is because interest rates and product fees are typically lower as lenders see buy-to-let properties as higher risk.

On top of paying a larger deposit, arrangement fees can be as high as 3.5% of the property's value. On a property valued at £225,000, the fee would be £7,875.

You'll also have to pay more stamp duty for a second property that is not your main home in England and Northern Ireland, which is:

• 3% for properties worth up to £250,000
• 8% for homes worth between £250,001 and £925,000
• 13% for properties worth between £925,001 and £1.5 million
• 15% for homes valued at over £1.5 million

What types of buy-to-let mortgage deals are there, and how can I get the best interest rate?

Most of high street banks and some specialist lenders offer buy-to-let mortgages. So it's worth looking for the best mortgage deals, such as two or five-year fixed-rate cashback mortgages.

As with residential mortgages, you’ll be able to access better rates with a bigger deposit (usually 40% or more).

Arrangement fees tend to be higher, so when comparing deals, evaluate the overall cost of the loan, as a cheaper initial rate can sometimes be outweighed by high fees.

A mortgage broker can search the whole market and recommend the best mortgage deal for you.

What kind of tax reliefs can landlords get, and is buy-to-let still worth it?

Changes to mortgage interest relief, tax laws and a surcharge on stamp duty for second homes has hit many landlords' profits.

In terms of mortgage interest tax relief, landlords used to be able to deduct interest they paid on their mortgage before paying tax, giving higher-rate taxpayers 40% tax relief on mortgage payments.

Now, landlords have a flat-rate tax credit based on 20% of their mortgage interest.

While this won't negatively affect landlords who are basic-rate taxpayers, it will impact higher or additional-rate taxpayers.

How do I get a buy-to-let mortgage?

Before you start a mortgage application, decide if buy-to-let is right for you.

As there are tax implications, so it's worth talking to a financial expert.

While bricks and mortar are generally considered a pretty safe bet, remember a buy-to-let property is an investment so you could make money, but you could lose it too.

You also have to consider if you're comfortable with the responsibility of being a landlord.

If you’ve decided a buy-to-let mortgage is right for you, follow the below steps.

1. Choose a property within your budget that’s desirable to renters and likely to make you a profit. 

2. Research what buy-to-let mortgages are available or speak to a mortgage broker to help you find the best deal. 

3. You should also speak to a lender to see if they can set up a mortgage in principle (MIP), which will let you know approximately how much you can borrow. 

4. Once you've found a suitable property and had your offer accepted, you can begin a full mortgage application and advise a solicitor to carry out the appropriate searches, surveys and contracts. If you are remortgaging a buy-to-let property, your solicitor will liaise with your current lender to move your mortgage to a new lender. 

Learn more: The best areas for buy-to-let in the UK

What do you need when you apply for a buy-to-let mortgage?

Similar to applying for a residential mortgage, you need to provide evidence about your finances, including: 

• Proof of identity such as a passport or driving licence
• Your last three payslips
• Proof of monthly outgoings
• Existing mortgage statement (if applicable)
• Utility bill statements
• P60 form 

A mortgage broker can help you ensure you have the right documents to hand to boost your chances of a successful mortgage application. 

How do you remortgage a buy-to-let mortgage?

One of the most common reasons for a buy-to-let remortgage is to purchase an additional property and to use equity from the first as the deposit on the second. 

You could opt for a full remortgage, paying off the original buy-to-let and replacing it with another. 

Alternatively, you could consider a second charge, which allows you to use any equity you have in a property as security against another loan, on the property. 

If you own four or more properties, consider a portfolio mortgage that covers them with one overall loan. 

What if I'm a portfolio landlord? How can I get a good deal on buy-to-let rates?

If you own many properties, you could remortgage them onto a multiple portfolio product, which may enable you to secure a better deal.

A mortgage broker will be able to give you more details about how this will work.

What kind of insurance should I get as a landlord?

When you become a landlord, you need specialist insurance as buy-to-let properties aren't covered by normal home insurance. 

These policies cover general risks such as fire, flooding and subsidence and also protect you against damage caused by tenants, unexpected legal costs, emergency repairs, loss of rental income, as well as your liability if tenants make a claim against you. 

If you own more than one buy-to-let property, you may be able to get one policy to cover them all, which can be easier to manage.

Looking for advice on buy-to-let? 

Unbiased can help you quickly find a qualified local mortgage broker who can search the whole market and help you find the best deal for your unique circumstances.