Buy to Let Mortgages

Borrowers who plan on buying residential properties to rent to tenants would need a Buy-to-let (BTL) mortgage. This type of mortgage is different from a standard residential mortgage.

Eligibility and lending criteria

Most mortgage lenders offer BTL mortgages but the lending criteria's widely vary e.g. if you are under 25 and earn an annual income of £25,000 or less then some providers will not even consider your application. Some lenders also like to enforce an age limit on the term of the mortgage, 70 is not unlikely. This means that the full mortgage would need to be repaid before the borrower has reached the age of 70. Lenders also find certain types of properties unacceptable; new properties, properties that are priced below a certain value, flats, former local authority-owned properties. Providers will sometimes limit the amount of BTL funding they are prepared to lend to a borrower or just limit the amount of BTL mortgages an individual can have at one time.

The aim with a BTL mortgage is to generate rental income and have made a profit by the time you come to sell the property. However, there are various different factors that you must think about; capital gains tax would need to be paid if your property sold for a profit, if your BTL had a variable rate basis then the chance of a higher interest rates being charged would need to be considered as this will effect your income and profit, the property market would also need to be considered as the house prices may fall which would mean that you could potentially have to sell the property for less than what you paid for it.

A MORTGAGE IS A LOAN SECURED AGAINST YOUR PROPERTY. YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.

MOST FORMS OF BUY TO LET MORTGAGE ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

Information is based on our current understanding of taxations legislation and regulations. Any levels and bases of, and relief from taxation, are subject to change.

The Financial Conduct Authority does not regulate tax planning.

Affordability

With a standard residential mortgage, lenders will look at the borrower's salary as the main source of income, however with a BTL mortgage lenders will often look at the rent you hope to receive from the property. Consequently, BTL providers favour applications where the rental income covers at least 125% of the monthly interest repayments. You can use the difference between the amounts to assist you in meeting your mortgage repayments when repairs to the property need done and/or when you're not receiving any rental income. The borrower's projections in terms of rental income must be verified by an independent source.

Interest rate

Because BTL mortgages represent a higher risk for lenders than standard residential mortgages, BTL borrowers are often charged higher rates of interest.

Credit record

Alike with all other mortgages, lenders will want to know and consider your personal credit rating. If you have any County Court Judgements, if you have failed to make any prior or existing loan repayments on time or any unpaid debts, the lender may decline your BTL application.

Deposit

With standard residential mortgages, you can get a loan-to-value (LTV) mortgage of 95%, meaning that you only need a deposit of 5% of the property's purchase price to get a mortgage. However, with BTL mortgages, you will need a deposit of at least 25% as the highest LTV most lenders will provide is 75%. The larger the deposit, the better rate of interest.

BTL mortgages — associated fees and costs

Survey: A surveyor will be assigned (at the borrower's expense) to evaluate the property's market value, condition, and potential rental income. A survey provides reassurance and can also help you decide whether or not to proceed with the purchase. If the surveyor reports problems that need to be remedied, you could still decide to proceed, using the survey findings to renegotiate the purchase price.

Conveyance: Conveyancing — which is typically overseen by a solicitor or conveyancer — is the means by which the ownership (legal title) of the property is transferred from the seller to the buyer. The seller pays for this cost.

Stamp Duty for Buy-to-let property: The purchaser may have to pay stamp duty land tax which is calculated as a percentage of the purchase price of the property. Furthermore, if the property you are buying is a BTL or second home, the stamp duty increases further — see the table below.

Property price Stamp duty rate
£0 - £145,000 0%
£145,000-250,000 2%
£250,000 - £325,000 5%
£325,000 - £750,000 10%
Over £75,000 12%

Other costs: The borrower may also have to pay arrangement and booking fees to the mortgage provider, which tend to be higher than those associated with a standard residential mortgage. It may be possible to include some or all of those fees in the advance.

Which type of mortgage?

Alike with standard residential mortgages, the same mortgage types are typically available for a BTL mortgage; fixed rate, variable rate, discount, tracker, capped rate. More often than not, the reason behind a BTL mortgage is for investment purposes, as a result some mortgage types would be more fitting than others. For example, if the borrower liked the idea that their mortgage repayment could potentially be less one month than the other, I would advise on a variable rate or tracker loan. However, if the borrower wanted consistency in his monthly repayments, I would advise on a fixed rate loan. Many BTL buyers favour the interest only mortgages as this means they are only paying off the interest on the loan until the property is sold.