Buy To Let

What is a buy to let mortgage?

A buy to let mortgage is a specialised type of mortgage designed for people who want to purchase residential property with the intention of renting it out to paying tenants. These mortgages are distinct 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. A normal buy to let mortgage would not suffice in that case. 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 standard mortgage?

A buy to let mortgage is purely for houses or flats that rent to paying tenants.

Repayment methods

It is common for a buy to let mortgage to be interest-only. This means each month you only pay back the interest owed. You will still owe the amount borrowed at the end of the mortgage term. It is usually repaid by selling the property. It is dependent on the property being worth enough to clear the debt in full.

In contrast, most standard mortgages are on a capital repayment basis. Monthly payments include interest as well as repaying the loan. If you make all payments in full and on time, you will pay the mortgage off at the end of the term and the property is yours.

It is possible to have a buy to let mortgage on capital repayment too.

Deposits

Generally the minimum deposit required for a buy to let mortgage is 25% of the value of the property.

Lenders view buy to let mortgages as slightly riskier than standard residential mortgages. This is because they have no knowledge of who will be living in the property. They vet the owner rather than the tenants.

If the tenants move out or refuse to pay, the owner will stop receiving rent. They could then be unwilling or unable to keep paying the mortgage. They would run the risk of repossession but, as they don’t live there, they may not care as much as they would if it was their own home.

Alternatively, if the tenants ruin the property, the owner might not be able to afford the refurbishments. Should the lender have to repossess, they might be left with a wreck that they can’t recoup their costs on.

This increased risk to the lender is why a bigger deposit is required for a buy to let mortgage.

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 standard mortgages.

Stamp duty is payable 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.

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

How much you can borrow is usually determined by the amount of rent the property might achieve from paying tenants. This figure is set by the lender’s valuer, who will look not just at your property but at rent achieved by similar properties 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. In other words, you shouldn’t be having to put some of your own money in every month to cover the mortgage and associated costs. The rent alone should pay for it and leave you with a bit of profit.

The lender might therefore say that they need the rent to be 125% of the monthly mortgage payment if the mortgage interest rate was 6.5%. The exact calculation will depend 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.

Some types of buy to let mortgages are not regulated by the Financial Conduct Authority.