What is a buy to let mortgage? Getting a buy to let mortgage

If this is your first time applying for a buy to let mortgage, it’s essential to get all the information you need to make an informed decision and enjoy peace of mind. Although there are a number of similarities with an ordinary mortgage, a buy to let mortgage does go hand in hand with a set of differences that it’s important to be aware of. Buying a property as an investment requires preparation and we’re here to provide all the necessary information for a successful journey when it comes to your mortgage. 

What is a buy to let mortgage?

For starters, before we dive into the details, let’s look at what a buy to let mortgage is in the first place. In short, a buy to let mortgage is a mortgage that is sold to investors or people looking to purchase a property as an investment. In this case, the property is not planned to serve as the main place to live but is rather purchased with the aim of either renting it to tenants. In most cases, buy to let mortgages are associated with larger deposits when compared to residential mortgages and perhaps higher interest rates. We’ll cover how much deposit for buy to let mortgages you’ll need later on in this article. 

Who can benefit from a buy to let mortgage?

You may be wondering if you’re eligible to receive this kind of mortgage. There is a set of buy to let mortgage criteria that determine whether getting a buy to let mortgage is an option for you or not. Here is a list of the circumstances, under which you have the opportunity to apply for a buy to let mortgage:

  • You are looking to invest in property
  • You are fully aware of the risks associated with property investment and you are willing to take them
  • You can show proof that you are already an owner of a property that is your home, regardless of whether you’ve paid our your mortgage or it’s still outstanding
  • Your credit record is good and shows your ability to manage your finances well
  • You can show proof that you earn at least £25,000 on a yearly basis. Individuals with fewer earnings per year may not be able to receive approval from lenders
  • You fall under a certain age category. Lenders work with certain upper age limits and, for instance, if you’re over 70 or 75 when the mortgage is set to end, you may not be able to receive a buy to let mortgage

A lot of people wonder how to get a buy to let mortgage without a job. This is indeed possible. After all, if you’re a professional landlord, chances are that all of your income comes from buy to let and you don’t have a regular nine to five job. If you can show proof for your properties or you can demonstrate your self-assessment tax return, you can still win the approval of lenders.

How does a buy to let mortgage work?

In most cases, unlike standard mortgages, buy to let mortgages are given on an interest-only basis. In other words, the individual is only obliged to pay the interest on the loan every month instead of paying for the capital as well. This significantly reduces the monthly expenses that you’ll need to pay but it also suggests that you need to prepare a plan for repaying the full loan or refinancing when the mortgage term comes to an end.

As we already mentioned at the beginning of this article, the fees and interest rates tend to be higher for buy to let mortgages when compared to standard mortgages. Also, it’s worth noting that such mortgages are usually not regulated by the Financial Conduct Authority unless you want to let the house or flat to a family member. In such cases, the mortgage is considered a consumer buy to let mortgage and is operated based on strict affordability rules, in a similar way as a residential mortgage.

How much deposit for a buy to let mortgage do I need?

Another common concern when it comes to how to get a buy-to let-mortgage is the deposit. Overall, every lender will have different expectations and regulations but on standard, you’ll need a deposit of between 20% and 25% of the property value. COVID-19 has certainly had an impact on the market and the deposits. Before the spread of the pandemic, landlords could enjoy deposits of 15% but today, this seems merely impossible.

Just like with residential mortgages, the higher the amount of the deposit you provide, the more beneficial rates you’ll be able to receive from the lender. For instance, if you are able to pay a deposit of 40%, you can expect to receive some of the most advantageous buy to let deals. However, this is not something all investors can afford. If you have experience as an investor or professional landlord, lenders will also consider your previous history and will assess your portfolio to establish the deal that they are willing to make with you.

How many buy to let mortgages can you have?

Is there a limit to the number of buy to let mortgages you can get? In fact, there is. The limit will depend on the lender that you have chosen to work with. Some lenders will choose to put a barrier on the number of buy to let mortgages you can have with them while others will also have a limit on the total number of buy to let mortgages you have with them or other lenders. In some cases, you can see lenders stating that you are not permitted to have more than three buy to let mortgages with them or perhaps exceed an amount of money for your borrowings.

When it comes to working with other lenders, most companies will put a limit between four and ten buy to let mortgages that you can have arranged with other lenders. You can also find mortgage companies that don’t have any type of limit and allow you to borrow as much as you need from as many different lenders as you please. However, bear in mind that if you fall under the category of Portfolio Landlords, where you have above four buy to let mortgages, lenders will need to carefully assess your application along with your full portfolio and full borrowing.

Ideally, lenders are looking for a 65% to 75% loan to value leverage of the full portfolio.

Buy to let mortgage rates you can expect

Although it’s difficult to pinpoint an exact rate that you can expect to receive, we can look at averages and trends on the market. For instance, it’s clear to see that rates for these types of mortgages have been dropping in cost since 2015. Towards the end of 2020, borrowers could expect to see an average fixed-rate buy to let mortgage with an interest of 3.1% as opposed to 3.99% in 2015. The COVID-19 pandemic has also had its fair share of responsibility when it comes to mortgage rates.

There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage. Your property may be repossessed if you do not keep up repayments on your mortgage. 

What you need to know if you’re a first-time buyer

But what if this is your first time getting a buy to let mortgage for property investment? Even if you’re a first-time buyer, you can still take advantage of a buy to let mortgage. However, there will be a few differences that you need to consider beforehand. For starters, it’s likely that you will be asked to pay a higher deposit than other experienced investors in order to take advantage of a good deal. Second, you won’t be able to enjoy any stamp duty relief if the property you’re purchasing will not be used for a home for you and your family. 

Generally speaking, you won’t be forced to pay as much as a non-first-time buyer buying a buy to let. You’ll be asked to pay a “home mover rate” which is the same amount that a non-first-time buyer buying a property for personal use will need to pay. Given that in the future you decide to purchase a property as a home while still having your buy to let property, you’ll need to pay the whole amount of the buy to let home surcharge. 

In addition, it’s worth noting that it may be more difficult to receive a mortgage when purchasing your first home considering that lenders will have in mind the debt you still owe on your buy to let mortgage. 

Stay informed

Buy to let mortgages are a great way to ensure a profitable future ahead of you if you’re looking to make money as a landlord. However, there are many aspects of the process that you need to be aware of in order to avoid negative consequences and unexpected situations. If you need professional help and advice, get in touch with us and we’ll be able to help with expert guidance and expertise. 

There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage. 

Your property may be repossessed if you do not keep up repayments on your mortgage.