You might hear a lot about buy-to-let mortgages and think it’s something you’d like to look into. Getting a buy-to-let mortgage is a great way to earn some extra income.
There are some hoops to jump through before you can be sure to get one, and in this guide we’ll explain all you need to know about buy-to-let mortgages.
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What is a buy-to-let mortgage?
A buy-to-let mortgage is more or less the same as a standard residential mortgage, except that you won’t be living in the property – you’ll be renting it out. You’ll be a landlord.
Some people who’ve been accepted for a buy to let mortgage are landlords alongside having another job, as a way of topping up their income. Whereas there are some landlords whose income solely comes from the properties they rent out.
Buy-to-let mortgage pros and cons
As with any type of mortgage, buy-to-let mortgages have their pros and cons. Whether or not you get a buy-to-let mortgage will depend on how important these pros and cons are to you.
What are the advantages of a buy-to-let mortgage?
- The first, and most obvious advantage of having a buy to let property is a steady income stream. A buy-to-let mortgage allows you, as a landlord, to have a new steady stream of income; a welcome addition to your bank account over time.
- You’ll have a long-term investment. House prices generally go up over time which means that you can be pretty sure that when you come to sell your buy-to-let property, it’ll be worth more than when you bought it. This doesn’t take into account the initial and ongoing costs of buying and maintaining the property, but as long as those costs aren’t too high you should have a good investment.
- You should get some tax benefits through your buy-to-let mortgage. Costs such as interest on your mortgage repayments, repair costs, council tax and more can be reclaimed through your Self-assessment Tax Return.
- Generally speaking, the rental market is always strong. There are always people looking to rent properties of all shapes and sizes. There are some areas where renting is more common but you certainly shouldn’t have too much trouble finding tenants for your buy-to-let.
What are the disadvantages of a buy-to-let mortgage?
- You’ll pay slightly more stamp duty. People who have buy-to-let mortgages have to pay 3% more stamp duty on their buy-to-let properties. This is one of the costs you should bear in mind when you’re looking for your buy-to-let mortgage.
- You might have an empty property. Although rental markets are generally strong, you will always carry the risk of having a property with no paying tenants when you get a buy-to-let mortgage. This is of course a worst-case scenario but it’s worth remembering when you’re applying. If you do end up with an empty property, you’ll still be liable for the buy to let mortgage payments.
- There might be market uncertainty. Buy to let property prices are at the mercy of the markets. After the 2007/08 Financial Crisis property prices went down considerably. While buy-to-let mortgages are long-term investments that can outlive any market turmoil, you should always keep an eye on how the markets might affect your buy-to-let. If you’re trying to get a buy-to-let mortgage at a time of market uncertainty, the likelihood is that you won’t get a deal that’s as good as when markets are healthy.
What’s the difference between a standard mortgage and a buy-to-let mortgage?
The key difference between a standard residential mortgage and a buy-to-let mortgage is that lenders focus on the profitability of the property rather than your personal financial affordability. During their assessment process, your lender will work out how much rent you’ll make from the buy to let and compare that with the amount you want to borrow on the mortgage.
You personal affordability is still a factor in the buy-to-let mortgage application process. It helps to have a relatively clean credit file, but the property’s income potential is the most important factor when applying for a buy to let mortgage.
You’ll also need to earn a minimum salary to get a buy-to-let mortgage. Each lender sets their own minimum but it’s generally around £25,000. There are lenders who’ll offer buy-to-let mortgages to people whose income is less than this, so get in touch with Mortgage Buddy to find out more about buy to let mortgages.
What kind of deposit do I need for a buy-to-let mortgage?
When you’re applying for a buy-to-let mortgage, lenders will generally want a deposit of around 25%. This equates to a loan to value (LTV) of 75% – that’s because LTV refers to the size of the loan compared to the value of the property.
There are some lenders who’ll accept a 15% deposit – your Mortgage Buddy will be able to help you find the right deal for you.
Of course, the higher your deposit the more choice of buy-to-let mortgage deals you’ll have. But thankfully lenders aren’t only concerned about the size of your deposit. As we mentioned earlier, they’re also focused on the profitability of the property as well as your personal affordability and credit profile.
How much does a buy-to-let mortgage cost?
In addition to the buy-to-let mortgage payments themselves, there are quite a few other costs you need to bear in mind when you’re thinking of applying. There are some standard fees, like stamp duty for example, that you’ll always have to pay when you take out a buy to let mortgage.
You might have to pay valuation fees as part of the application process. Some lenders cover this cost for you but many don’t, so it’s worth finding that out before you apply.
It’s likely you’ll need a solicitor to help you with some of the legal parts of the buy-to-let mortgage application process. Solicitor fees vary depending on which you use, but this is a cost that you really should pay to make sure your application is as strong as possible.
It’s also super important to bear in mind the fees you’ll have to keep on top of as a landlord. Repairs, maintenance and agency fees are the key costs to remember when applying for a buy to let mortgage.
Because the money you make from renting out your buy-to-let property, it’s classed as income. As such you’ll have to pay income tax on what you earn.
You should also remember that insurance is really important when you’re renting out your property. There are loads of different types of insurance out there, but the two key ones to look out for are rent insurance and landlords insurance.
Way down the road, if you decide to sell your buy-to-let property, you’ll have to pay Capital Gains Tax on that amount.
Most buy to let mortgage lenders have their own level of rental income required to take out a buy-to-let mortgage. In many cases lenders say that your rental income should cover at least 125% of your mortgage. In real terms this means that if your monthly buy to let mortgage repayment is £1,000, you should be charging at least £1,250 to rent out the property.
Should I choose a tracker or fixed buy-to-let mortgage?
People also ask this question when they’re getting a residential mortgage, and luckily the answer is the same for buy-to-let mortgages.
There is a slight difference between a buy-to-let tracker, fixed, a residential tracker and fixed mortgage:
- With a fixed-rate buy-to-let mortgage the rate of interest you pay is fixed from the day you take out the mortgage (at some point it’ll probably move onto a variable rate – most fixed-rate mortgages do this). A lot of people like this option because it gives them the security of knowing how much their mortgage payments will be each month.
- With a tracker buy-to-let mortgage the interest rate can go up or down based on the Bank of England interest rate. It’s slightly more risky because you can never quite be sure what’ll happen with the market and interest rates overall. But there is also a chance of making a saving over the fixed-rate mortgage.
It’s generally agreed that the difference between a tracker and a fixed-rate buy-to-let mortgage isn’t huge. In fact there are a lot of fixed-rate mortgages that have almost the same rates as some tracker mortgages.
Basically, the best thing you can do is let Mortgage Buddy find you the best buy-to-let mortgage deal for your situation. Get a quote today!
Should I get an interest-only buy-to-let mortgage?
Good question! Many landlords opt for an interest-only buy-to-let mortgage. With an interest-only mortgage, you’ll only initially repay the interest accrued each month. When the mortgage comes to an end you can then pay off the full buy to let mortgage with capital you have in savings or from selling the property itself.
You should be aware of the risk that your property might go down in value. While this is unlikely and property prices tend to go up over time, if yours has gone down at the end of your interest-only buy-to-let mortgage, you’ll be liable to cover the difference.
Can I get a buy-to-let mortgage on a property with existing tenants?
You might want to take out a buy-to-let mortgage on a property that already has tenants living in it. This is very common. You might hear the acronym HMO talked about in this context – this stands for ‘House in multiple occupation’. This refers more specifically to a house with several contracted tenants, rather than, say, a house with a single family renting it.
Most help to buy mortgage lenders are fine with you taking on a buy-to-let mortgage if there are already tenants living there. Your lender might want to see the existing tenancy agreements for the current tenants.
Some tenants like the idea of taking out a buy-to-let mortgage on a property with existing tenants. It can take the stress and work out of finding new tenants. However, some landlords prefer to set up their own tenants and tenancy agreements on their own terms.
Can I have a buy to let mortgage alongside my standard residential mortgage?
Many lenders actually require you to have your own residential mortgage if you’re applying for a buy-to-let mortgage.
Can I get a buy-to-let mortgage if I’m not a homeowner?
If you don’t own your own home you’ll probably find it difficult to get a buy-to-let mortgage. Lenders want to see that you’re able to keep up with mortgage repayments. If you can’t prove this, it can be too risky for the lender to let you borrow on a buy-to-let mortgage.
However, there are some specialist lenders that will lend in these circumstances. Get in touch with us to find out if you’re eligible for a buy-to-let mortgage.
Can I get a buy-to-let mortgage on any property?
Not necessarily. The condition of the property is a factor here. If the buy to let lender deems the property to be inhabitable due to structural damage, for instance, then they likely won’t lend to you for that property.
Another factor is whether you’re hoping to buy a leasehold flat. You’ll need to find out whether the freeholder has a managing agent for the property. If they don’t, your lender might decline your application.
This might also depend on what you’re planning to use the property for. For example, if you were planning to rent it to a family member, your lender probably wouldn’t be able to offer you a standard buy-to-let mortgage. But again, there are lenders that will.
Can I get a buy-to-let mortgage with bad credit?
Yes, it’s certainly possible to get a buy-to-let mortgage if you have bad credit. The good thing with a buy-to-let mortgage is that lenders don’t rely solely on your personal credit profile to judge the affordability of the mortgage. They also assess how much money you should be able to make from the buy-to-let property.
Having a healthy and clean credit file is a plus when you’re trying to get a buy-to-let mortgage, but it certainly isn’t the be-all and end-all. There are lots of specialist lenders out there that judge affordability in different ways and so it’s absolutely possible that you can get a buy-to-let mortgage if you have poor credit history or a CCJ.
For more information on Help to buy mortgages, get in touch with a member of our expert mortgage advice team using the contact form below.