Buy-to-let mortgages enable landlords to purchase properties with the intention of earning rental income. But how exactly do they function, how can you secure one, and what sort of rates should you expect? This guide will provide answers to these questions and additional insights.
What is a buy-to-let mortgage & how do they work?
A buy-to-let mortgage is a specific type of mortgage designed for purchasing property intended to be rented out to tenants. While it shares similarities with residential mortgages, the key difference lies in how affordability is evaluated. Instead of focusing on your personal income, buy-to-let lenders determine the maximum loan amount based on the anticipated rental income from the property.
Additional distinctions between buy-to-let and residential mortgages include:
- Higher deposit requirements for buy-to-let properties
- Typically higher interest rates
- Most buy-to-let mortgages are interest-only
- The majority of these mortgages are unregulated
- Higher stamp duty rates apply
Like residential mortgages, buy-to-let mortgages can have either fixed or variable interest rates, and lenders offer a variety of deals with differing introductory rate periods.
How affordability is calculated
Buy-to-let mortgage providers determine the maximum amount they are willing to lend based on the strength of the investment. Most lenders require that the projected rental income exceeds the mortgage payments by at least 125% to 145%.
Some lenders also consider personal income, requiring applicants to earn a minimum of £25,000 from other sources. However, certain providers rely solely on rental income to make their lending decisions.
Top Slicing
A minority of lenders offer a middle-ground solution called top slicing, allowing you to supplement any shortfall between the rental income and mortgage payments with your personal income. This can help you qualify for a mortgage if the rental income projection falls short.
Providing Proof of Income
To obtain a rental income projection, you can consult an ARLA-approved letting agent. However, the actual proof comes from the valuation report, which confirms whether the projection is realistic. For personal income verification, lenders typically require three months’ bank statements and wage slips. Portfolio landlords, looking to expand, may also need to provide two years’ tax returns and copies of existing lease agreements.
Calculating Your Mortgage Repayments
Buy-to-let mortgage repayments are calculated similarly to residential mortgages. Monthly payments are based on the loan amount, interest rate, and term length.
Deposit requirements and other criteria
Most buy-to-let mortgages are available with a loan-to-value (LTV) ratio of 75-85%, meaning you will need a deposit of at least 15-25% to secure approval. While your options may be more limited with a smaller deposit, they are not entirely unavailable.
The table below reveals how many approachable lenders there will be based on your LTV.
|
Loan-to-Value (LTV) Ratio |
Approximate Number of Willing Lenders |
|
90-100% |
None - seek professional advice |
|
80-90% |
30 |
|
70-80% |
More than 60 |
|
60-70% |
More than 70 |
|
50-60% |
More than 70 |
Other eligibility requirements
Below you will find the other criteria you will need to meet to qualify for a buy-to-let mortgage:
- Landlord experience: Although there are lenders who offer mortgages for first-time landlords, most lenders prefer applicants to have buy-to-let experience.
- Homeownership: Your options will be restricted if you are applying for a buy-to-let mortgage and don’t own a residential property. Most lenders in this market prefer borrowers who have owned their own home for at least six months.
- Credit history: It is possible to get a buy-to-let mortgage with bad credit, but your chances of approval may depend on the age and severity of the credit issues, as well as why they occurred. There are specialist lenders for landlords with more severe adverse.
- Age: Specialist advice is recommended if you will be aged 75-85 during the mortgage term, as age restrictions will prevent some mortgage providers from approving you.
- Property type: If the property you want to let out has unusual features or non-standard construction, you might be limited to specialist lenders. Furthermore, some buy-to-let lenders won’t offer finance for HMOs or multi-unit freehold blocks.
- Energy Performance Certificate: All buy-to-let properties in England and Wales must hold an EPC rating of at least ‘E’ unless exempt. You can read more about the rules and regulations surrounding this on the UK government’s website.
It's important to remember that you don’t need to meet all of the criteria outlined above exactly. There are specialist buy-to-let lenders who offer greater flexibility with their lending requirements.
How to get a buy-to-let mortgage
Here are the steps to follow to get started with a buy-to-let mortgage application:
Determine Your Rental Income: If you're uncertain about the potential rental income from the property, consult an ARLA-approved letting agent for an initial estimate. The actual rental income will be formally verified through the valuation report.
Speak to a Broker: Once you've selected a deal that suits you, your broker will assess your case to ensure you meet the eligibility requirements and are securing the best possible offer. They will leverage their expertise and lender relationships to ensure a smooth application process. started below:
Which lenders offer buy-to-let mortgages?
Most high street mortgage providers, such as HSBC, Natwest, Santander, and Barclays, offer a variety of buy-to-let mortgage products. However, there are also specialist lenders like Godiva and West One Loans, who may provide more flexible lending criteria.
Here are some examples of specific criteria from these lenders:
- HSBC: Offers buy-to-let mortgages with a maximum LTV of 75%.
- Santander: Lends on standard properties as well as freehold houses with self-contained flats, provided acceptable leaseholds and management arrangements are in place.
- West One Loans: Allows borrowing up to £10 million across a property portfolio, with no limit on the number of properties or loans held with other lenders.
- Godiva: Specialises in buy-to-let mortgages, capping the LTV at 75% for new build properties.
- Barclays: Offers a range of deals, including loans for first-time landlords, with no specific restrictions mentioned for new landlords
Converting an existing mortgage to buy-to-let
If you currently have a residential mortgage and wish to convert it to a buy-to-let to generate rental income, this may be possible either through your existing lender or by switching to a new one. Most lenders typically require that you have lived in the property for at least six months.
This process would be treated as a remortgage, with the lender conducting an assessment to ensure you meet their buy-to-let mortgage criteria. In addition to standard checks, they will want to know your living arrangements after you let out the property. If you plan to take on a new residential mortgage or pay rent, they will include this in their affordability calculations.
As a first step, it’s advisable to consult your current lender to see if they can offer you a buy-to-let product. However, speaking to a mortgage broker before committing is essential, as there may be more competitive deals available elsewhere.
If you are considering converting your current property to a buy-to-let while securing a new residential mortgage for another home, a let-to-buy mortgage could be a tailored solution that allows you to manage both transactions at the same time.
Let-to-buy mortgages
Let-to-buy mortgages allow you to take out two mortgages simultaneously: a buy-to-let mortgage on your current property and a residential mortgage for purchasing a new home.
When converting your existing mortgage to buy-to-let, you can release equity from your current property, which then serves as the deposit for your new home purchase.
To qualify for a let-to-buy mortgage, you generally need to hold 60% to 75% equity in your current home, with 5-10% of this being used as the deposit for your new property. Standard eligibility criteria apply to both the buy-to-let and the new residential mortgage.
Some lenders offer let-to-buy mortgages as a combined package, providing both the buy-to-let and residential deals. However, it’s also possible to use separate lenders if doing so offers better rates or more favourable terms.
Types of property you can invest in
You can potentially secure a buy-to-let mortgage on various types of property to generate rental income. However, lenders often impose specific loan-to-value (LTV) caps depending on the property type and investment, as the associated risk can differ from one to another.
The table below offers an overview of the types of property you can use a buy-to-let mortgage to invest in, and the typical LTV requirements you might encounter:
|
Property Type |
Typical LTV Requirement |
|
Student lets |
75% |
|
HMOs |
70-80% |
|
Holiday lets |
75% |
|
Freehold house with self-contained flats |
70-75% |
|
New builds |
65-75% |
|
Overseas property |
70% |
|
Ex-local authority buildings |
70-75% |
Remortgaging a buy-to-let property
Buy-to-let remortgages function similarly to residential remortgages. Most landlords start the process at least six months before their introductory rate ends to avoid moving onto the lender’s more expensive standard variable rate (SVR).
Exclusive rates and deals are often available for buy-to-let remortgage customers, with some lenders providing incentives for switching, while others offer benefits for loyal customers.
Securing the best deal will largely depend on the strength of your application, particularly the amount of equity you hold and the status of your credit history.
Although many lenders require at least six months to pass before offering a remortgage, specialist providers offer day-one remortgages, which can be beneficial for property owners looking to refinance for investment purposes.
When refinancing a buy-to-let property, it is possible to release equity, a strategy commonly used by portfolio landlords to expand their property holdings. Read more below to understand how this can help grow your portfolio.
Mortgages for portfolio landlords
Buy-to-let landlords who own four or more investment properties are classified as ‘portfolio’ landlords, and certain lenders offer tailored solutions for these borrowers.
A portfolio mortgage allows you to consolidate multiple mortgages under one agreement with a single lender. This simplifies management by providing one monthly mortgage statement instead of several, making it easier to track rental income and repayments.
Additional benefits include access to exclusive rates from some lenders and the ability to release equity during remortgaging, which can be used to expand your property portfolio.
General Criteria for Portfolio Mortgages:
- Minimum Properties: You must own at least four buy-to-let properties.
- Maximum Properties: Limits vary by lender; some cap at five properties, while others allow up to 10 or more. Certain lenders may also restrict the number of properties mortgaged with other institutions.
- Borrowing Limits: The maximum borrowing is based on the rental income potential of the portfolio properties. Many lenders cap aggregate borrowing at around £5-10 million, though some impose no limit.
- Business Plan: For high-value portfolios, some lenders may require a business plan to demonstrate the viability of the investments across the portfolio.
Options for first-time landlords
Getting a buy-to-let mortgage as a first-time landlord can be more challenging, but only a few lenders will reject your application outright due to your inexperience. Others may apply specific conditions, such as an LTV cap, minimum personal income requirements, or restrictions on certain property types.
Most lenders require first-time landlords to at least own a residential property, but the overall criteria for new entrants in this market remain largely the same.
Some lenders classify you as a first-time buyer if you haven't owned an investment property in the last six months, while others only do so if you have never owned one at all.
Frequently Asked Questions
Yes. While most buy-to-let mortgages are taken out on an interest-only basis, repayment buy-to-let mortgages are also an option for landlords who prefer to pay off the loan over the term and are willing to manage higher monthly repayments.