Buy-to-let mortgages

A buy-to-let investment may require borrowing money from a lender. Often this process can appear complicated, but in reality there are only a few simple things you need to take into consideration.

These are the main considerations when looking for a buy-to-let mortgage:

What is a buy-to-let mortgage?

A buy-to-let mortgage is a loan specifically designed for landlords who intend to lease their property out to a tenant rather that occupy it themselves. The landlord will typically charge a monthly rent to the tenants in relation to the value of the house. These mortgages often require a larger deposit and interest rates are, generally speaking, a little bit higher than those for a standard residential mortgage as they carry a greater risk for the lender. Another key difference to consider is that arrangement fees tend to be higher for buy-to-let mortgages.

Will I need to find a specialist?

Many high street banks offer buy-to-let mortgages at competitive rates, although their checks can be rather stringent as they tend to be more risk averse than a specialist lender. Depending on your strategy, and what you intend to do with your property, your best options may vary. If you are looking to purchase one or two properties as a pension then it may be preferable to go to a high street lender, but if you intend to build a large portfolio then a specialist lender may be the best fit.

What are the typical requirements?

Lenders are looking for investors who have a sizeable deposit to put up against a loan. While a residential lender may be asking for 5-10% of the value of the property as a deposit, most buy-to-let lenders will require at least 25%. The maximum loan-to-value most lenders will consider is 75%, with only a few specialist lenders willing to go slightly higher. Lending criteria may also be more exacting than for a standard residential loan. Usually, lenders will look at how much rent you’ll earn each month from the property – this will need to be verified by a surveyor. Unless the rent is worth at least 125% of the monthly mortgage interest payment, they may refuse the mortgage.

if you are a foreign national looking for a buy-to-let mortgage then the process is slightly different. Please see our dedicated foreign national advice section for more information.

What types of buy-to-let mortgages are available?

Once you’ve found the property you want to buy and have selected a lender, you need to decide how you’d like to repay the loan. You can choose to pay either interest only or capital repayment:

Interest-only mortgage - these are mortgages where you only pay the lender the interest payments for a fixed term period. The interest-only route is usually more popular with professional landlords and property investors for two main reasons. With an interest-only strategy, the investor’s aim is usually to continue building a large portfolio of property. By choosing this strategy, the investor has the cash flow to reshuffle their property capital in order to increase their number of properties. In other words, this helps investors think in the long term. At the end of the mortgage term, the property is usually sold to repay the initial advance. There are also certain tax advantages to an interest-only mortgage as interest due on buy-to-let mortgages can be offset against tax - however, these are matters best discussed with a professionally qualified accountant.

Capital repayment mortgage - In contrast to interest-only mortgages, a capital repayment mortgage allows the investor to repay the value of the loan plus the interest over a fixed term. The obvious benefit of this choice being that at the end of the lending term the landlord owns their property and won’t have to sell it to repay the loan. These types of loans are typically popular with people who already have, or intend to acquire, a small portfolio of properties as they are then able to retain the full asset value at the end of the loan. Capital appreciation as well as rental yields are key for investors who choose this type of mortgage.

Whether you decide to approach a high street or specialist mortgage lender, and whether you decide to opt for interest-only or capital repayment, loans will depend entirely on your circumstances and each option provides benefits relevant to different interests. The key is to research each option as thoroughly as possible and shop around for the best rate. As much as each choice provides you with unique benefits, you will offer equally unique benefits to the loan provider so it is in everyone’s interests to get you the best deal.

However, it is much more difficult to secure a mortgage for an off-plan property. Generally, mortgage lenders don’t like lending against a property that has not yet been built since they rely on conveyancing to deem the value of the property. That’s not to say they are impossible to acquire - a select few lenders may consider an off-plan property - but it is certainly much rarer.

Disclaimer: As with all mortgages, your home may be repossessed if you do not keep up repayments.


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