What is a Buy-to-Let mortgage?

Buy-to-let mortgages tend to be taken out by people looking to invest in property. These people are known as landlords. Whilst the process for a buy-to-let mortgage is similar to a normal mortgage, there are some key differences you should be aware of. That’s why we’ve put together this useful article to explain buy-to-let mortgages, how they work, who can get one and the pros and cons of doing so.

So, what is a buy-to-let mortgage?

A buy-to-Let (BTL) mortgage is a mortgage taken out by people who plan to rent the property out, rather than living in it themselves. People commonly take BTL mortgages out on interest only, which means that the monthly mortgage payments will only pay off the interest. You’ll then be required to pay off a lump sum (the amount borrowed) at the end of the mortgage term. Buy-to-let mortgages can also be taken out on a repayment mortgage depending on your individual needs.

A buy-to-let mortgage normally requires a minimum deposit size of 25% and is accompanied by higher interest rates, which means BTL mortgages aren’t necessarily open to everyone.

Who can get a buy-to-let?

Whilst there’s no hard and fast rule to say who can and can’t get a buy-to-let mortgage, because lenders view BTL mortgages as higher risks, there are certain conditions you’ll need to meet to be eligible. Though not extensive, some of these are:

• You must provide evidence of earnings, outside of any rental income. This generally needs to be £25,000 or more, per annum. If you don’t earn this much, you may struggle to get your buy-to-let mortgage application approved.
• You need to have a good credit score. Showing lenders you are reliable with paying money back, will make you less of a risk when it comes to borrowing.
• You need a deposit of 25% or more of the property value.
• The monthly rental income received needs to cover the full monthly mortgage payments as well as an additional 25%.

What are my responsibilities as a landlord?

Being a landlord comes with different responsibilities. Not only are you responsible for the safety and upkeep of the property, from fire alarms to gas safety checks, it’s also your responsibility to ensure the tenants you rent to are legally allowed to live in UK– this is a called a right to rent check.

Advantages of buy-to-let mortgages

Most people choose to invest in property because it can prove to have a good return. Whilst every monetary adventure can come with some risk, there are some advantages to buy-to-let mortgages.

• Generate an income – if the amount you charge for rent is more than the monthly mortgage payments, the money leftover could serve as a monthly income.
• Long term investment – your property could gain value overtime. This means if you sell it in the future, it could be worth more than you originally paid for it.
• Demand – rental housing is currently very in demand due to a lack of affordable housing. This means there are more people looking to rent.[1]

[1] https://www.zoopla.co.uk/discover/property-news/rental-market-report-march-2023/

Disadvantages of buy-to-let mortgages

Although investing in property comes with considerable monetary benefits, being a landlord means that you are responsible for anything that may go wrong with the property. So, what are the disadvantages?

• Property damage – if anything goes wrong with the property, from a broken boiler to structural damage, it’s the landlord’s responsibility to organise getting it repaired, as well as footing the bill.
• Stamp duty – there are different percentages of stamp duty fees payable depending on the value of the property. This can range from 3% – 13%.
• Cost of no renters – although renting is in high demand, you may find yourself in periods where there’s no one to rent your property to. During these periods you’ll have to make sure you can afford to pay the mortgage payments on the rental as well as any other expenses you already pay.

So there we have it, a quick guide through the buy-to-let mortgage process. If you’re thinking about investing and don’t know where to start, or want some advice on your current investment portfolio, our expert advisers to answer any of your questions.

Most Buy-to-Let Mortgages are not regulated by the Financial Conduct Authority.

Some fees may be chargeable for mortgage advice.

[1] https://www.zoopla.co.uk/discover/property-news/rental-market-report-march-2023/