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Buy-to-let mortgages explained

Jan 03, 2024
Buy to let mortgage explained
If you’re buying a property to rent out, buy-to-let mortgages are for you. This guide explores how buy-to-let mortgages work, who’s eligible and how to apply if you’re a first-time buyer.

Key Takeaways

1. What is Buy to Let?
  • Buy to Let (BTL) refers to purchasing a property specifically for renting it out.
  • As a landlord, you let the property and charge rental payments.
2. How Buy to Let Works:
  • Buy the property, act as the landlord, and collect rental income.
  • Rental payments should cover maintenance costs, letting agent fees (if applicable), and monthly mortgage repayments.
3. Costs Involved:
  • Pay the deposit, mortgage fees, and Stamp Duty when purchasing a BTL property.
  • Existing property owners pay a higher rate of Stamp Duty.
  • Renovation and improvements may be necessary before renting out the property.

4. Buy to Let Mortgages Explained:

  • A BTL mortgage is specifically for rental properties.
  • Unlike residential mortgages, BTL mortgages are usually interest-only.
  • Monthly payments cover only the interest, and the capital must be repaid later.

What is a buy-to-let mortgage?

A buy-to-let mortgage (BTL) is designed for people who want to buy a property to rent out rather than to live in. They’re ideal for landlords looking to widen their portfolio or investors looking for their next opportunity. 
 

Who’s eligible for a buy-to-let mortgage?

To apply for a buy-to-let-mortgage, you should: 
 
  • Be 21 years old
  • Have a good credit score 
  • Have an income of at least £25,000 a year
Some lenders may also require you to own a house outright or with an outstanding mortgage.
 

Is a buy-to-let mortgage right for me?

You need to know your property’s rental yield to ensure a buy-to-let mortgage is profitable. A good rental yield is benchmarked at 5%. 
 
For instance, if your home costs £100,000 and you charge your tenants £200 a week, your annual rent will be £10,400. Divide 10,400 by 100,000 and multiply by 100. The rental yield is 10.4%. 
 

How do buy-to-let mortgages work?

Buy-to-let mortgages are similar to residential mortgages, but some key differences include:
 
  • How much you can borrow 
  • Buy-to-let mortgages are interest-only 
  • Buy-to-let mortgages may require a larger deposit 

The amount you can borrow 

The amount you can borrow is based on your rental income. Ideally, this should be 20-35% higher than your mortgage payments. Lenders want to ensure you have enough to cover your mortgage payments.
 

Interest-only mortgage 

Buy-to-let mortgages are interest-only. This means you’ll pay interest on your mortgage instead of the total loan amount. Your monthly payments will decrease with time, but you may need to sell the house, remortgage or pay the loan in full once the term ends. 
 

Higher deposit 

You’ll need a 20-25% deposit for a buy-to-let mortgage. Many lenders will also charge a product fee. 
 

How to apply for a buy-to-let mortgage

Ready to apply for a buy-to-let mortgage? The first step is contacting a mortgage broker, who can advise on the best deal. Below are the documents you’ll need to provide:
 
  • 3 months of payslips, bank statements and self-assessment tax returns (if self-employed)
  • Proof of ID and current address
  • Proof of deposit
  • Details of your solicitors and estate agent
  • Mortgage statements for your existing properties (if applicable)

How long does my buy-to-let mortgage application take?

It typically takes 2 to 4 weeks to receive an offer on your buy-to-let mortgage application. 
 

Buy-to-let mortgages for first-time buyers

You can get a buy-to-let mortgage as a first-time buyer, but it may not be as straightforward. When it comes to first-time buyers, most lenders:
 
  • Ask for a larger-than-average deposit (typically between 25-40%)
  • Charge a higher interest rate
  • Look for a higher projected rental income to cover mortgage payments
Buy-to-let mortgages can bring significant benefits to first-time buyers. They’re a safe long-term investment, as property values will likely increase.
 
Explore our wide range of homes across the UK and unique offers to help you become a property investor.  
 

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