What Is a Buy-to-Let Mortgage?
A buy-to-let or buy to rent mortgage is a type of mortgage specifically for properties that are owned or purchased with the intention of renting them out.
They're often set up on an interest-only basis, which means you only make monthly interest payments each month. The outstanding loan balance - i.e. the amount you borrow - doesn't reduce and is paid back at the end of the mortgage term via a suitable repayment vehicle, usually the sale of the property.
If you rent out a property on which you only have a residential mortgage, you’ll be in breach of your mortgage agreement which could put your property at risk of repossession. To rent out your property without breaching your mortgage agreement you'd have to either obtain consent to let from your existing lender or switch to a buy-to-let product.
We explain more about how buy-to-lets work in our guide.
Why Is Finding the Right Buy-to-Let Deal Essential?
Rental properties are popular investments because they can be very successful at delivering a profit. It’s essential you have the right mortgage if you want to make the most of this kind of financial venture - otherwise what’s the point? No one wants a subpar investment.
As an independent mortgage broker with over 40 years’ experience, we're perfectly placed to advise you and find a mortgage that matches your property needs. John Charcol has access to the whole of market and we're experienced in finding the most suitable mortgage product for less conventional situations.
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Buy-to-Let Mortgage Criteria and Considerations
Your adviser will ask you for a rental income estimation when they first gather information about your circumstances and requirements. A rental income estimation is basically how much you think you’ll be able to charge in monthly rent on a property. You can ask estate agents for rental income estimates when you view properties. It’s also worth looking online at the rent for similar properties in the area you want to purchase. You need to provide your adviser with a rental income estimation as the lender will use your expected rental income to calculate what you can afford in monthly interest payments when they put together your DIP (Decision in Principle). They usually ask for rental income to be between 125% and 145% of the monthly interest payments and often conduct a “stress test” assuming an interest rate of around 5% to make sure you’ll be able to cover any fluctuations in interest rates or surprise expenses. Buy-to-let lenders will still look at your personal income to check you would be able to cover any periods when the property is vacant or any future repairs.
Rental property mortgages have higher interest rates and usually require bigger minimum deposits than residential mortgages - 25% compared to 5% or 10% - to compensate for the additional risk taken up by the lender.
Minimum and maximum ages for buy-to-let lenders vary but a few will accept applications from people as young as 18 years old and some will go as high as 85 years old.
You can be a first-time buyer, first-time landlord, experienced landlord or professional landlord. Which lender you use depends on individual lenders’ preferences, but typically first-time buyers will find fewer lenders willing to lend on buy-to-let properties. Not all lenders accept large portfolios either.
Location of Borrower's Residence
Buy-to-let lenders normally require that borrowers live in the UK. There are some lenders that accept expat applicants, but these underwriters may have slightly stricter overall criteria.
A poor credit history can make it difficult to obtain a mortgage, especially one at a particularly competitive rate. There are some lenders that are more flexible than others but these often require that you use a broker like John Charcol.
Landlords are taxed differently from private residential property owners. You’ll pay additional Stamp Duty when you buy your property and Income Tax on the rental income you receive from your tenants. It’s also worth nothing that you might have to pay Capital Gains Tax if you eventually sell the buy-to-let property.
Why Should You Use a Buy-to-Let Mortgage Broker?
Mortgages are complicated and it’s a broker’s job to find you a suitable product.
But why is it so important to use a broker for a buy-to-let?
- It’s not always easy to find the right information about the potential property types or the affordability criteria you need to meet online. We know the requirements for each lender and will look at your entire situation and future needs, so we can advise you accordingly
- Some lenders require that you use a broker and won’t accept applications directly from applicants, which means we can give you access to more lenders and better rates
- Buy-to-lets can be particularly complex, especially if you’re a new landlord. We make sure you understand how these mortgages work and exactly what you’re applying for
How Can John Charcol Help You Get a Buy-to-Let?
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Our Buy-to-Let Process
1. Meeting with Adviser and Mortgage Research
When you phone us, you can either arrange a phone appointment with your adviser or a face-to-face meeting – whatever suits you. Your adviser will ask you some questions and, once they have all the information they need, they’ll go away and find you the mortgage for your circumstances and future needs. They’ll also arrange a follow up call to present you with what they’ve found. It may require more than one conversation to gather all the right information, depending on where you are in your property search.
2. Decision in Principle
Once you’re happy with their recommendation, they’ll go about securing your DIP (Decision in Principle) - which is basically a promise from the lender that they’ll loan you money on the condition that the information you’ve provided is correct and subject to a valuation of the property.
3. Offer on Property
After you’ve secured a DIP (Decision in Principle), you’ll be in a great position to make an offer on a property. Sellers like DIPs. They show you can afford the purchase. What’s more, the fact that you’ve already started preparing for the transaction highlights to them that you’re serious in your intention to buy.
4. Pre-Application and Submission
Following the acceptance of your offer, we’ll send you some information which explains all the documents we need to submit to the lender. You’ll be assigned a client relationship manager who’ll check and submit certified copies of your documents; they’ll liaise with both you and the lender. Your adviser will then submit the fully packaged mortgage application.
5. Lender Underwriting and Valuation
The lender will underwrite your application; this basically means they’ll verify the information you’ve provided and review all your documents for themselves. They’ll also instruct a valuation for their purposes on the property you want to buy to make sure there are no significant problems with it.
6. Mortgage Offer
If the lender is happy with everything they’ve found, they’ll send you a mortgage offer. They’ll also send us a copy.
After you’ve accepted your mortgage offer, you’ll go through the legal part of the process, known as conveyancing. This is where the solicitors/conveyancers draw up contracts and organise the actual, legal purchase of the property. You’ll also need to arrange buildings insurance at this stage, making sure it’s in place from exchange.
8. Exchange and Completion
Once everything is in place, your conveyancer/solicitor will exchange contracts with the seller’s conveyancer/solicitor. It’s at this point that you put down your deposit and are legally bound to buy the property. You’ll lose your deposit if you pull out after exchange. The purchase completes when money is transferred on an agreed-upon date. As soon as you have a date for completion you’ll know when the property can take tenants, therefore you can start speaking to a letting agent.
Not only do we organise your mortgage, we can refer you to a trusted solicitor for the conveyancing part of the process. We have access to a select panel of trusted conveyancers and solicitors, which means we can find you legal advice specific to your needs.
We can help you prepare your property for tenants with our exclusive Concierge Service - available through our partners Just Move In. They’ll organise for your property to be cleaned and, if you’re furnishing your property, they’ll arrange all the removals.
Are Buy-to-Let Interest Rates Different from Residential Rates?
Even the cheapest buy-to-let mortgage rates tend to be a little higher than the rates on residential properties as buy-to-lets are riskier investments for lenders.
For example, if you have a mortgage on your home and a mortgage on a rental property, but you find yourself able to make only one of these monthly payments, it’s very likely you’ll prioritise the mortgage payment on your home over the one on the rental property.
Therefore, to compensate for the additional risk, buy-to-let lenders set interest rates slightly higher. They also usually require a bigger minimum deposit – usually at least 25%.
You can look at rates from across the market with our free comparison tool.
How Many Buy-to-Lets Can I Have?
Lenders have different rules regarding how many mortgages you can take out with them for buy-to-let properties. There are also some limits based upon your entire portfolio, including any properties mortgaged with other lenders. Many high street lenders cap the number of buy-to-let properties at 3 - 5, but there are some lenders that work exclusively with portfolio landlords who own 4 + properties.
How Much Can I Borrow for a Buy-to-Let?
The amount you can borrow and the rates available to you will depend on the size of your deposit and your expected rental income, as this will determine how much you’ll be able to afford in monthly interest payments. Use our buy-to-let calculator to estimate how much you could borrow.
Can You Change a Residential Mortgage to a Buy-to-Let?
You can apply for consent to let on your residential property from your current lender if you only intend on renting it out for a certain period of time - e.g. a year. Alternatively, if you want to let out your current home indefinitely and maybe release some equity from it at the same time to buy a new home, you’ll want to consult a mortgage broker about letting to buy.
Can a First-Time Buyer Get a Buy-to-Let?
It is possible for a first-time buyer to take out a mortgage on a buy-to-let property but there are very few lenders available that offer these kinds of niche products, so you may want to consult a mortgage broker.
Can You Get Mortgage on a Buy-to-Let Property with a Deposit of Less than 25%?
There are a few buy-to-let lenders that offer LTVs (loan-to-values) higher than 75%. You may want to speak to a mortgage adviser if you’re after one of these slightly more specialist mortgages as they tend to be relatively expensive.