Buy To Let Mortgage
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What is a buy to let mortgage?
A buy to let mortgage is a specialised type of mortgage that people use when they want to purchase a house or flat with the intention of renting it out to paying tenants. These mortgages differ from standard residential mortgages as they are tailored to the specific needs of landlords and property investors.
If you are planning on buying a property to rent out to a family member, that’s slightly different. In that case, a normal buy to let mortgage would not suffice. Likewise, there are special mortgages for holiday lets, too.
This page covers buy to let mortgages for individuals. If you are looking for information on limited company buy to let mortgages, view our page here.
What are the differences between a buy to let mortgage and a normal residential mortgage?
People use buy to let mortgages purely for houses or flats that they rent to paying tenants.
Repayment methods
Many buy to let mortgages are interest-only. In this case, you pay only the monthly interest, leaving the borrowed amount outstanding at the end of the term. Usually, you repay this by selling the property. If the sale proceeds aren’t enough to cover all that is owed, you need to find additional funds from elsewhere, such as savings.
In contrast, people who take out loans to buy homes to live in often pay back a bit of the loan and some interest each month. If they make all the payments in full and on time, they completely repay the mortgage at the end of the term without an additional lump sum payment.
You can also opt for a capital repayment structure with a buy to let mortgage.
Deposits
You typically need a minimum deposit of 25% of the property’s value for a buy to let mortgage.
Lenders consider buy to let mortgages slightly riskier than standard residential mortgages because they lack information about the property’s occupants. They assess the owner rather than the tenants.
If tenants move out or refuse to pay, the owner stops receiving rent. The owner might then be unwilling or unable to continue mortgage payments, risking repossession. As they don’t reside there, they may not care as much as they would if it were their own home.
Alternatively, if tenants damage the property, the owner might not be able to afford the refurbishments. If the lender has to repossess, they could be left with a property they can’t recoup costs on.
The increased risk to the lender is the reason a larger deposit is required for a buy to let mortgage.
Read our guide to deposits for more information on where your deposit can come from.
Interest rates and fees
A rental property is a business venture. That plus the higher risk involved to the lender, as discussed above, means interest rates and fees are often higher than on an equivalent standard mortgage.
You also have to pay Stamp Duty on every rental purchase, too. It is 3% more than Stamp Duty payable when buying a home for you and your family to live in, except if you are a first time buyer.
Why The Mortgage Store Chorley?
Exclusive rates you won’t get directly from lenders
A dedicated point of contact from initial enquiry right through to completion and beyond
Appointments seven days a week, to best suit your schedule
Ongoing rate monitoring until completion as standard
Do you have a question?
Can I live in my buy to let property?
You can’t live in your own buy to let property. If you want to buy a property to live in, you need a residential mortgage. Buy to let mortgages are for landlords renting to paying tenants; paying rent to yourself doesn’t work!
Living in your buy to let property likely breaches the mortgage conditions and might be seen as fraudulent, potentially leading to a criminal prosecution. Lenders could insist on full repayment of the loan, and might even repossess the property if you’re unable to pay.
If a lender suspects you intend to live in the property, they could decline your application.
Can a family member live in my buy to let property?
If you want to rent a property to a relative, you need a regulated buy to let mortgage, which offers greater protections to consumers. Standard buy to let mortgages are not regulated because they are seen as business transactions; they often involve professional landlords looking to refinance or expand their portfolios.
Regulated buy to let mortgages are considered quite high risk. The main issues might come from getting less rent money because family members expect special treatment, being late with rent payments or not paying at all, or just regular family disagreements.
It’s important to be up-front about your intentions for the property so the right type of mortgage can be found.
Do I need to declare rent to HMRC?
Yes, you need to declare income from renting properties out on a yearly tax return, whether it’s paid into your bank or as cash.
What deposit is needed for a buy to let mortgage?
Typically 25% of the purchase price as a minimum.
How much can I borrow on a buy to let mortgage?
The amount you can borrow is usually determined by the potential rent the property might achieve from paying tenants. The lender’s valuer sets this figure by examining your property and comparing it to similar rented ones in the area.
Lenders then apply a background stress test to work out how much you can borrow. They want the property to be self-financing, meaning the rent alone should cover the mortgage and associated costs, and still leave you with some profit. In other words, you shouldn’t be having to put some of your own money in every month.
The exact calculation depends on the individual lender. Some have different calculations depending on factors like your tax status, how many properties you own, and whether you want a two or five year fixed rate.
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Is there a minimum salary for a buy to let mortgage?
Some lenders insist on a minimum earned income of £20,000-£25,000. This gives them more confidence that you can afford the mortgage payments if the rental property is empty.
Other lenders don’t have this requirement, but they usually want to see some form of income.
Does having a buy to let mortgage affect my personal residential mortgage?
If the rental property is self-funding, and you haven’t missed any payments, then it shouldn’t affect your ability to get a residential mortgage.
If your rental property is empty when you come to apply for a residential mortgage, or if the tenants aren’t paying rent, or are paying reduced rent, this could restrict how much you could borrow.
Missing mortgage payments will also negatively impact your credit rating and make it more difficult to get a mortgage in future.
What documents are needed for a buy to let mortgage?
The documents needed for a buy to let mortgage are similar to those needed for any mortgage.
These include proof of ID and proof of address, income verification, and bank statements.
It’s important to have up-to-date tenancy agreements and Energy Performance Certificates (EPCs) for existing properties.
If you already own buy to let properties, you should be declaring the rental income to HMRC. We’ll need copies of your tax calculations, and possibly your tax returns too, to verify this.
How can The Mortgage Store Chorley help with buy to let mortgages?
We are seasoned professionals in the field of buy to let mortgages.
One size does not fit all when it comes to property investment. We understand that your investment goals, financial situation, and risk tolerance are unique. That’s why we craft personalised mortgage solutions to match your specific needs. Whether you’re a first-time investor or a seasoned pro, we have options for you.
Some types of buy to let mortgages are not regulated by the Financial Conduct Authority.
