What is a Buy-to-Let Mortgage?
When it comes to investing in property, a common way of financing is to apply for a Buy-to-Let mortgage. This type of mortgage is slightly different to a standard residential mortgage and is sold specifically to those planning a property investment.
Although there’s several different types, a typical Buy-to-Let mortgage is offered on an interest-only basis. This means that your repayments only cover the interest, your overall loan will not go down and will need to be paid in full at the end of the term.
Buy-to-Let mortgages usually require a larger deposit and result in a higher rate of interest.
Who can get a Buy-to-Let Mortgage?
Buy-to-Let mortgages are not just made available to people that want to invest in property. There are other criteria that need to be filled before the application is successful:
The applicant needs to own their own home, whether they’ve bought outright or have an outstanding ‘regular’ mortgage.
The applicant should have a good credit record and not be stretched with other borrowings such as credit cards. Many lenders will also struggle to approve a buy-to-let mortgage for those who earn under £25,000 plus a year.
Finally, the person applying for the Buy-to-Let mortgage will need to be under a certain age. Lenders tend to only offer mortgages to those who will be under 75 at the end of the lending period. For example, a 30-year mortgage at the age of 45 would end on the last year of the upper-age limit.
How Do You Get a Buy-to-Let Mortgage?
Although Buy-to-Let mortgages are less available than regular mortgages, they are offered by most large banks and specialist lenders around the country. Always consider talking to a mortgage expert before taking out a Buy-to-Let mortgage as they can inform you of the difference between mortgage types and find the most suitable offering for you
Remember that if you use a price comparison website to find your Buy-to-Let mortgage, not all of the sites will give you the same results, so make sure you use more than one site before reaching a final decision.
Also, remember that there are often headline rates offered on a mortgage but these aren’t final – a number of other fees and charges can be involved.
What Mortgage Types Are There?
There are several common mortgage products you may come across as a Buy-to-Let investor:
Capital Repayment – Sometimes referred to as a Repayment Mortgage, this product means the investor pays back both the capital and the interest during their mortgage term. It typically requires having more cash upfront as you’ll have little in the way of rental returns but it does offer the best long-term return on capital employed (ROCE).
Interest Only – Another popular option, this product means you’re only paying off the interest, resulting in lower monthly repayments and more rental returns to utilise month-to-month. While this type is useful for leveraging and scaling, it can’t match the long-term returns of a Capital Repayment mortgage.
Fixed Rate Mortgage – This is a type of ‘Interest Only’ product and guarantees a fixed interest rate for a set period of time, which ensures your monthly payments are the same each time – usually between two and five years.
Tracker Mortgage – This is a type of ‘Interest Only’ product and follows the Bank of England’s base rate. When it rises or falls, so does your interest payments. This can be good if rates are falling but can obviously result in different monthly repayments if it rises.
How Do Buy-to-Let Mortgages Work?
Buy-to-Let (BTL) mortgages work like regular mortgages but have some key differences that set them apart. First and most importantly, fees tend to be much higher than a regular mortgage, with interest rates that are usually higher.
In the current market, interest rates are at some of the lowest they’ve ever been. The minimum deposit for a Buy-to-Let mortgage is usually 25% of the property’s value, although it varies between 20% and 40%.
Many BTL mortgages work on an interest-only basis – meaning you don’t have to pay monthly but at the end of the term you repay the original loan in full. Some mortgages can also be made available on a repayment basis.
How Much Can You Borrow for Buy-to-Let Mortgages?
The maximum amount you can borrow on a Buy-to-Let mortgage is decided primarily by the amount of rental income you’re expecting. It’s usually required to be around 25 – 30% higher than the mortgage payment.
If you’re looking to find out what rental income you can be expecting, consider doing the research. Speak to local lettings agents, check the local listings and identify past performance.
Buy-to-Let Mortgage Tax relief explained
In April 2017, the system of calculating tax on rental income for landlords was altered significantly. By April 2020, landlords will no longer be able to deduct mortgage expenses from rental income and will instead have a 20% tax credit on the net rental income.
This system was implemented in phases, with the deductible amount being decreased by 25% every year from 2017 to 2020.
Since the system changed, landlords have faced phased decreases in the percentage of mortgage payments that can be deducted from rental income and increases to the percentage of these mortgage repayments that qualify for a new 20% tax credit.