What is a buy-to-let mortgage?
A buy-to-let mortgage is a loan specifically designed for people who are buying a property with the intention of renting it out. It allows aspiring landlords to secure financing for investment properties, or to rent out their own home. Buy-to-let mortgages are seen as higher risk than traditional mortgages, because of the possibility of having periods with no income while in between tenants, and so are subject to their own eligibility requirements.
How do buy-to-let mortgages work?
Buy-to-let mortgages are usually repaid on an interest only basis. This means you only pay the interest on the loan each month, not the loan itself.
This is different to the usual residential mortgage, where you pay back both the interest and part of the loan amount each month.
This keeps monthly repayments on buy-to-let mortgages lower but means you will need to pay the full amount at the end of the term, usually by selling the property. However, if the price of the property has fallen, you may need to use some of your own money to pay off the debt.
How is a buy-to-let mortgage different from a residential one?
- The fees are often higher with buy-to-let mortgages, as much as 3.75% of the property’s value.
- Interest rates are usually higher too due to the increased risks involved.
- Lenders often require larger deposits for buy-to-let mortgages, typically around 25% of the property's value, although this can vary.
With a buy-to-let mortgage, the lender will ask you to show how much rental income you expect to receive. They may require the rental income to cover a certain percentage of the mortgage payment, usually around 125-145%. This ensures that even if the property experiences empty periods or rental fluctuations, you can still meet the mortgage repayments.
The loan-to-value (LTV) ratio represents the percentage of the property's value that is being borrowed. Because lenders see buy-to-let mortgages as higher risk, you will usually need a much bigger deposit than for a standard mortgage, around 25% or higher.
Am I eligible for a buy-to-let mortgage?
Most lenders will view a buy-to-let mortgage as more risky so there are usually different eligibility criteria to qualify for one. These differ between lenders but may include:
- You earn more than £25,000 a year and can show you’ll still be able to make payments if interest rates rose or the property sat empty for a few months.
- You have a good credit score and history. Lenders will assess your creditworthiness, including your credit score, history of repayments, and outstanding debts.
- You are under a certain age. This is usually around 70-75 years old.
- The lender may require you to already own a residential property but this isn’t always the case.
What are the top things I should think about as a buy-to-let landlord?
To have the best chance of making your buy-to-let a success, you should consider:
How much you can borrow will depend on how much you can rent your home for.
Lenders will usually require your rental income to be 25-45% higher than your mortgage repayments. So if your monthly repayments are £1,000, you need to be earning at least £1,250 a month in rent. Don’t forget, you also need to make sure you have enough money for at least a 25% deposit too.
At Smarter Rent, we use decades of data and experience to source buy-to-lets for our clients that generate a yield as high as 11% in the Home Counties. We choose properties in areas with high rental demand such as Woking or Bracknell. These areas are popular with renters leaving London and looking for more space, a sense of community and good transport links.
You will need to assess the property's condition and weigh up whether putting budget towards repairs or renovations will increase your rental income. New kitchens and bathrooms can be expensive but also give a higher quality home, allowing you to earn a higher rental income. At Smarter Rent, we have a dedicated design team who assess each property against a 107 point checklist. We will propose a refurbishment plan based on this and manage all of the works too.
Legal and regulatory compliance
As a landlord, it’s important to understand the legislation that applies to you. Health and safety documents such as gas safety certificates, EPCs (energy performance certificate), electrical certificates and PAT testing of electrical items should be carried out. And you will need to check your tenant’s right to rent and carry out anti-money laundering checks too. The Renters’ (Reform) Bill which was introduced to Parliament in May 2023 is making some fundamental changes to the private rented sector to create a fairer system with higher quality homes. It’s worth keeping up to date with news on the Bill.
If you work with an agent such as Smarter Rent, we will take care of all of this for you.
How do I get a buy-to-let mortgage?
Most of the big banks and specialist lenders offer buy-to-let mortgages so it’s worth shopping around. You can use an online comparison site such as money.co.uk.
Increasing house prices, changes to mortgage interest relief, tax laws and the 3% stamp duty surcharge for second homes has made it harder for landlords to make a profit. You should also take into account other fees and charges.
If you’re savvy and know all of your upfront costs, you can account for it.
What are the risks and rewards of buy-to-let mortgages?
To know whether buy-to-let is still worth it, you should take account of the risks as well as the benefits.
The benefits of buy-to-let
- The reason most people invest in buy-to-let is for monthly income. Rental yields vary across the county and by property, so make sure you get an accurate calculation before you buy. If you already own a property, you can use our yield calculator to find out how much rental income you could be earning. Of course, if the property increases in value, you will also benefit from capital appreciation when you refinance or sell the property.
- Investing in property has traditionally been a stable investment, suitable for those nearing retirement and looking to build a nest egg for their future.
- For people with investments in more volatile assets, such as cryptocurrencies, property can provide diversification to reduce their level of risk.
The potential risks and challenges
- Mortgage rates have risen dramatically over the last six months, making it harder for landlords to earn a profit from their rental income. As well as picking the right property in the right location, good photos, accepting pets and providing an energy efficient home can contribute to maximising your rental income.
- You’ll need to budget for various expenses including stamp duty, insurance, maintenance costs and potential void periods. It’s important to plan your finances before purchasing the property to make sure you can afford any unexpected costs.
- Being a landlord can be time consuming and stressful. Ensuring you are compliant while marketing your property to find reliable tenants and avoiding empty periods can be a full-time job. Agents such as Smarter Rent will take care of this for you. From photos to contracts to maintenance issues, we can get you a worry free investment with none of the hassle.
A Smarter way to buy-to-let
If you’re looking for a buy-to-let but don’t have the time to source the best possible investment, that’s where we come in.
With our help, you can own a fantastic property asset that generates you a healthy monthly income and capital appreciation, but without any of the headaches that make being a landlord feel like hard work.
If you’d like to find out more about how we can help you get on the buy-to-let ladder, reach out to us today.