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Buying a property to rent out can seem like a great way to make easy money and save for future investments. While this can sometimes be the case, there are also significant risks to consider. When you buy a property for the purpose of renting it out, you will need a buy-to-let mortgage.
While similar to standard residential mortgages, there are some key differences. Here’s what you need to know about buy-to-let mortgages and how to determine if this type of investment is right for you.
If you plan to rent out your home, you need a buy-to-let mortgage. You can only get a standard residential mortgage if you plan to live in the property yourself. There are some key differences between buy-to-let and ordinary mortgages that could potentially make it more difficult to buy a property for rental purposes.
Mortgage providers see buy-to-let mortgages as higher risk than residential mortgages. This is because landlords often face problems with rent collection, and it is unlikely that your property will constantly be occupied.
Because of the higher risk involved you will need to pay a larger deposit for a buy-to-let mortgage. This is usually a minimum of 25% of the total value of the property, although this can vary depending on the lender and type of mortgage. You can sometimes pay a minimum deposit of 20% for a buy-to-let mortgage, although some of the best mortgage rates available require a deposit as high as 40%. Other fees tend to be higher too when taking out buy-to-let mortgages. Arrangement fees can be as high as 3.5% of the property's value.
Many buy-to-let mortgages are interest-only, compared to residential mortgages which are usually capital and interest loans. This means that landlords only pay monthly interest payments, rather than repayments on the loan itself. This usually results in lower monthly payments for buy-to-let mortgages. However, the mortgage must be repaid in full at the end of the term. Most landlords will pay for this by selling the property, although if house prices have fallen since the time you bought the property then you will struggle to repay the mortgage. You should make sure you have enough savings to cover these circumstances.
The monthly interest payments on a buy-to-let mortgage depend on several factors, including the size of your loan, the rental value of your property, and your financial situation. The type of mortgage you choose, fixed rate or variable rate, will also make a big difference, as each has its own advantages and drawbacks.
A fixed rate mortgage usually lasts between two and five years. Your monthly payments remain the same throughout the term, offering stability and predictable costs. This can help you set consistent rent levels for tenants. However, fixed rates are often slightly higher than variable ones, and you won’t benefit if interest rates fall. Once your fixed term ends, you’ll automatically move to your lender’s Standard Variable Rate (SVR), which is typically more expensive, so it’s best to look for a new deal before your term expires.
An SVR is the lender’s default rate, usually applied after a fixed or discounted deal ends. These mortgages tend to have higher interest rates that can change at any time at the lender’s discretion. The main advantage is flexibility, you can switch to a new deal without paying exit fees.
Tracker mortgages have variable rates that move in line with the Bank of England base rate. Your payments can rise or fall depending on interest rate changes. While this means you could benefit from lower payments when rates drop, you’ll also face higher costs if rates increase.
These mortgages are set at a fixed discount below your lender’s SVR for a limited time, typically around two years. For example, if your lender’s SVR is 5% and your discount is 1%, your rate would be 4%. However, because the SVR can change, your payments can still go up or down. Once the discounted term ends, you’ll revert to the SVR.
Your monthly mortgage payments are not the only costs of becoming a landlord. There are several ongoing expenses that can significantly affect your profits.
If you use a letting agent to manage your property, expect to pay between 10% and 17% of your monthly rental income for full management services. One-off letting services usually cost about one month’s rent. Agents may handle tasks like finding tenants, running credit checks, writing contracts, and ensuring the property meets safety standards.
Also known as buy-to-let insurance, this typically includes buildings, contents, and liability cover. Buildings insurance is usually required by lenders, while contents insurance is optional and covers your furnishings. Landlord liability insurance protects you if a tenant or visitor is injured on your property, sometimes required if renting to students.
Rental income is taxable and subject to your income tax band (20%, 40%, or 45%). You can deduct allowable expenses such as agent fees, maintenance, and council tax. Since April 2020, mortgage interest is no longer fully deductible; instead, landlords receive a 20% tax credit on mortgage interest payments.
If you sell your buy-to-let property for a profit, you’ll pay CGT at 18% or 28%, depending on your tax bracket. You have a tax-free allowance (£11,700, or £23,400 for jointly owned properties). Profits must be reported on your Self Assessment tax return.
An additional 3% surcharge applies to buy-to-let properties costing over £40,000, on top of the standard Stamp Duty rates.
You’re responsible for repairs, appliances, and building upkeep, not your tenants. Maintenance costs can add up quickly, so it’s wise to set aside a reserve fund.
There may be times when your property is vacant or tenants miss payments. During these periods, you must still cover the mortgage. Failing to do so could lead to repossession, so having savings to cover missed rent is essential.
The amount you can borrow depends on how much rent you can realistically expect for your property. Most lenders will typically require you to receive 125% of your monthly interest payments in rental income but can sometimes be as high as 145%.
You can estimate how much rent you can charge by researching similar properties in your area, but your lender may also require verification of your property's rental value from a surveyor. If your provider requires your rental value to be 125% of your interest payments, then you will need to charge your tenants at least £750 a month if your monthly interest payments are £600. This means that the more you can charge in rent, the higher the loan you should be eligible for.
As with all mortgages, a buy-to-let mortgage will have a loan-to-value ratio. This is calculated by the size of your loan as a proportion of the total value of the property. The remainder is made up by your deposit. For example, if your property is valued at £200,000 and your mortgage is £180,000, your LTV ratio would be 90% and you would pay a deposit of £20,000.
Applying for a buy-to-let mortgage is not as easy as getting a standard residential mortgage. If you want to invest in property and become a landlord, but don't have enough capital to buy a property outright then you will need a buy-to-let mortgage. But before you dive in, there are certain criteria that you must meet in order to be eligible for one.
Firstly, usually, you must already own a home yourself, either outright or with an existing mortgage. Your lender will then assess your financial situation, much like for all mortgage applications. You are much more likely to get a better deal if you have a good credit rating and haven't racked up large levels of debt either now or in the past, such as on your credit card. You are also much more likely find a lender who will provide you a mortgage if your salary is over a certain amount. Many lenders expect landlords to be earning at least £25,000 a year.
You may also find it difficult to secure a buy-to-let mortgage if you're too old. Many lenders set upper age limits, usually at 70 or 75 years old. However, this doesn't mean that a 65-year-old can easily walk into a mortgage provider and take out a buy-to-let mortgage. The upper age limit refers to the age you will be at the end of your mortgage term. As most mortgages last for 25 years, you would normally need to be 45 years old or younger to be confident of securing a loan. Not all lenders have upper age limits however, and some can be as high as 90 years old.
Deciding to invest in a buy-to-let property can be a significant financial decision, here are some things to think about before looking at new mortgage deals:
Investing in a buy-to-let mortgage could potentially offer you a steady stream of rental income and the possibility of property value appreciation. This could be a considerable advantage if you're looking for long-term investment growth. However, the success of this investment depends heavily on market conditions and the right property choice.
The initial financial outlay for a buy-to-let property is substantial, including a large deposit, high arrangement fees, and possible stamp duty charges. Besides these initial costs, as a landlord, you'll face ongoing expenses like maintenance, insurance, and property management fees. Additionally, rental income can be unpredictable due to tenant vacancies or unforeseen maintenance issues. Remember, if you can't make your mortgage repayments, your home could be repossessed.
Many buy-to-let mortgages are interest-only, which typically means lower monthly payments during the term but requires you to pay off the loan in full at the end. Changes in interest rates can significantly affect your payments, especially with variable-rate mortgages. This could impact your ability to profit from the property or even maintain it if rates rise substantially.
Being a landlord is not just an investment, it's a role that requires commitment and effort. You must manage property upkeep, tenant relationships, and adhere to legal standards, which can be both time-consuming and stressful. Consider whether you have the time, skills, and inclination to take on this role.
Start by researching the market thoroughly to compare the different rates and terms available from various lenders. We make this process easy for you with our comparison tool that allows you to see how different buy-to-let mortgages weigh up against the competition.
Consider the type of mortgage that suits your strategy, whether fixed-rate to keep your costs predictable over a certain period, or a tracker mortgage which could potentially offer savings if interest rates drop. Factor in the fees and other costs associated with each mortgage product, as these can significantly affect the overall cost of your mortgage, even if the interest rate seems favourable.
You also need to ensure you understand the eligibility requirements and have a solid financial plan in place to manage your investment, including a buffer to cover potential rental voids or unexpected repairs, which are crucial for sustaining a profitable buy-to-let venture.
Once your interest-only mortgage deal ends, you will still be expected to pay off the cost of the property at the time you bought it. Most people do this by selling the property. This is where most landlords make their profit, although it is not always so simple. If house prices have fallen since you purchased the property, and the current value of the home is lower than when you bought it, you will make a loss. You will be expected to cover the remainder with your own money.
A buy-to-let mortgage is specifically designed for properties that will be rented out, whereas a standard residential mortgage is for a property you plan to live in. The key differences include the requirement of a larger deposit for buy-to-let, potentially higher interest rates due to the perceived higher risk, and the common use of interest-only payment structures in buy-to-let mortgages, meaning you only pay the interest each month rather than paying down the principal.
Yes, mortgage rates are typically higher for buy-to-let properties compared to residential mortgages. This is because lenders view rental properties as higher risk, mainly due to potential rental vacancies and the uncertainty of tenant payments affecting the landlord's ability to cover mortgage costs.
For a buy-to-let mortgage, you generally need a larger deposit than for a residential mortgage, typically around 25% to 40% of the property’s value. Some lenders may accept a 20% deposit, but offering a larger deposit can secure better interest rates and terms.
Yes, you can change your residential mortgage to a buy-to-let mortgage, which is common when homeowners decide to move and rent out their existing home. However, you will need to get permission from your current lender or possibly refinance with a new lender under a buy-to-let agreement, which might involve different terms and conditions, including a reassessment of your eligibility.
No, you cannot live in a house if you have a buy-to-let mortgage on it. These mortgages are designed for use on a rental property only, and living in the house yourself could violate the terms of the mortgage agreement. If your circumstances change and you wish to move back into the property, you may need to switch to a residential mortgage.
