Buy to Let Mortgage Guide
Buying a property to let it out to tenants is a big decision that requires a lot of research and consideration. For most people, the decision to buy a property for this purpose requires a mortgage. A buy to let mortgage is a specific type of mortgage product that can help those looking to buy property as an investment, instead of buying a residential property to live in. But investing in a buy to let property has different eligibility criteria to a residential purchase and the types of mortgage available differ too.
In our buy to let guide, we explain each stage of the buy to let process, from the deposit you’ll need to the types of buy to let mortgages and how much stamp duty you can expect to pay on a buy to let property.
What is a Buy to Let mortgage?
A buy to let mortgage is typically for landlords that are looking to purchase a property to rent out, rather than live in it. Buy to let mortgages are usually interest-only. If you want to rent out your property, you’ll need a buy to let mortgage. But how do buy to let mortgages work, and what sets them apart from a standard mortgage product?
Mortgage providers consider buy to let mortgages a higher risk than a standard mortgage, as landlords can face problems with tenants and collecting rent, and there may be periods where the property is unoccupied.
Because of the higher risk, you may be expected to pay a larger deposit for a buy to let mortgage, which is typically a minimum of 25% of the property value. The amount you’ll need as a deposit, however, will vary on the specific mortgage product and the lender – some may accept 20% while others will require as much as 40%.
How does buy to let work? Most buy to let mortgages are interest-only, whereas residential mortgage repayments are usually a combination of capital and interest. For landlords, this is a benefit as it means that they can make lower monthly repayments. However, the mortgage still needs to be paid in full at the end of the term, so landlords typically pay for this by selling the property.
Buy to Let mortgages during Coronavirus
The pandemic created various problems within the property sector, but the buy to let mortgage market has recovered swiftly. The most significant change that potential landlords may face is a higher deposit requirement and longer service times to process mortgage applications.
Before COVID-19 hit, the majority of lenders offered 85% LTV rate for buy to let mortgages. And while the market has improved, the maximum LTV rate for most lenders is now 80%.
Lender service times have slowed down as a result of the higher volume of applications from people hoping to take advantage of the stamp duty holiday offered by the government. The good news for landlords, however, is that aside from these changes, the market is much the same and buy to let mortgages are still being issued during this time.
What deposit do you need for a Buy to Let mortgage?
One of the most common questions regarding letting out property is ‘how much deposit do I need for a buy to let’? And the answer depends on the lender you apply for your mortgage with and the value of the property you’re purchasing.
But the minimum deposit most lenders will require is 25% of the property’s value for a buy to let property. However, the best deals are typically available to investors with deposits of 40% and above.
In addition to considering how much deposit you’ll need for a buy to let, you should also consider how your own financial situation may affect your application. Most lenders prefer you to:
- Own your own property already
- Have a clean credit score
- Earn over £25,000
However, ticking at least two of these boxes may be sufficient for your application. Another factor in addition to your deposit is the type of property you’re hoping to purchase, as the affordability based on rental income will play a big role in whether a lender will approve the mortgage.
Remember that when you’re saving for a mortgage, it’s not just about pulling a deposit together. You also need to factor in arrangement fees and legal costs into your budget as well.
Types of Buy to Let mortgages available
There are several types of buy to let mortgages available, depending on what your requirements are, how much deposit you have and how long you want the mortgage for. The range of mortgages that will be available to you depends on the size of the deposit you can put down on a property – for those with larger deposits, lenders will typically offer better rates, as these individuals are deemed less of a risk.
But if you’re a first time buy to let buyer, finding it challenging to pull a larger deposit together, don’t worry – there are still several types of mortgage to choose from and various lenders you can speak with. Working closely with a mortgage broker can help in this regard, as they have access to the whole market and can help you find the right deal for your needs.
Fixed rate Buy to Let mortgages
Fixed rate buy to let mortgages offer an easier way of budgeting your expenses and rental income each month, as you’ll know precisely what each monthly repayment will be.
So, what is a fixed rate buy to let mortgage? With this mortgage product, you will have a fixed repayment amount for a specified period of time, often between 2 and 5 years. In most cases, the longer the fixed period, the higher the level of interest will be.
Tracker rate Buy to Let mortgages
Tracker mortgages are one of the most popular mortgage types. But what is a tracker rate buy to let mortgage? These types of mortgage follow a base rate, set by the Bank of England.
Tracker rate buy to let mortgages have a rate of interest which is set to a percentage above the lender’s variable rate but it is capable of fluctuating, so if the Bank of England’s base rate rises or falls, so will your interest rate.
Variable rate Buy to Let mortgages
Variable rates can change at any time, as interests change. So, what is a variable rate buy to let mortgage? Variable rate buy to let mortgages are either fully variable, where the lender determines the rate and can change this at any time, or they can be based on the standard Bank of England base rate.
While this type of mortgage is beneficial if interest rates drop, if they increase, you will have higher monthly mortgage repayments.
Consumer Buy to Let mortgages
Consumer buy to let mortgages are one of the less common types of mortgages. They are regulated in the same way as residential mortgages and are designed for individual landlords who operate on a part-time basis, rather than people who rent out properties full time.
So, what is a consumer buy to let mortgage? This type of mortgage product offers consumer protection for people letting out properties that they own. But there are stricter criteria that applicants need to meet in order to get a consumer buy to let mortgage, with lenders examining your income and expected rental income.
How much can you borrow for a Buy to Let mortgage?
When it comes to buy to let ‘how much can I borrow’ is one of the most common questions for first time buyers who are new to property rental. But the maximum amount you can borrow is actually linked to how much rental income you expect to receive from the property. This will vary from location to location, and the type of property will also impact the income you would expect to receive.
Lenders usually require the rental income to be in the region of 25-30% higher than the mortgage payment, so in order to see how much you can borrow, you’d need to examine the type of property you’re looking to buy and how much similar properties are being rented for in the surrounding area. You can use online rental calculators to estimate how much a lender may allow you to borrow, based on the expected income you expect to receive for your property.
Is Buying to Let right for you?
While there are many benefits to investing in buy to let, there are considerations to make as well. Is buy to let a good idea for you? It depends if you prefer to make investments into tangible products rather than stocks and shares, and if you’re prepared to have your money tied up for long periods of time.
Investors in property need to be aware that prices can go down just as easily as they can go up, so there is always a risk – as with any financial investment – that you may lose money if the market isn’t buoyant at the time of you selling the property on.
Becoming a landlord requires a lot of prior research and a thorough understanding of the property market – it isn’t a decision you should take on lightly. While buy to let properties can be a great revenue stream, they are also a significant investment that comes with its own set of risks. There are also responsibilities that landlords have to manage and be prepared for.
If you’re considering becoming a landlord and investing in buy to let, it’s worth taking time to research the type of property you’re looking to buy, the area where you want that property to be and the type of tenants you’re hoping to rent it out to. Will the property you want to buy appeal to them? Is the area most likely to appeal to them – is an area that’s popular with young professionals, for example, likely to also appeal to families?
Consider how cashflow will impact your plans as a buy to let investor too. When you’re budgeting, don’t forget that you may not always have tenants in the property, but you will still be responsible for the monthly repayments. Make sure that you always have enough cash in reserve to cover these payments if you have a period where the property is empty. This cash buffer can also be used for repairs, replacing appliances if your property will be furnished, or any other emergency you may need it for.
As a landlord, are you prepared for the tax implications of buy to let? Any profit you’ll make from your rental property will be liable for tax, although certain costs will be offset against this such as maintenance costs and management or accountancy fees.
There are two options for people becoming landlords.
- A full-time professional landlord is someone who rents out properties to their tenants directly, managing any repairs and answering queries. As a full-time landlord, you’ll be responsible for setting up a safe-deposit scheme.
- A part-time landlord owns the property and is responsible for paying the mortgage, but they may hire a letting agent to manage the property, deal with the tenants and handle incoming rent.
Naturally, it’s less time-consuming to be a part-time landlord, but it depends on your financial goals and whether you are happy to invest money into paying a letting agent a share of your rental income for them to manage the property. Most letting or management agents take between 10 and 20% in fees to find tenants and manage the property.
Whichever capacity you choose, as a landlord, you will be responsible for several aspects of the property from a legal standpoint, including:
- Fire safety
- Electrical safety
- Gas safety
- Identity checks for tenants to ensure they have a right to live in the UK
Is buy to let worth it? For those who accept the costs and time involved in owning and renting out property, buy to let can offer great rewards and be a brilliant opportunity for extra income each month. But there are risks involved that you should be fully aware of and prepared for that go along with borrowing money to buy property.
How many Buy to Let mortgages can you have?
You’ve weighed up the pros and cons and made the decision to invest in buy to let. In some cases, landlords may even want to expand their portfolio and let out multiple properties at one time. But how many buy to let mortgages can you have at once? While technically, there is no limit, it actually depends on the lender and how much they are willing to lend you, based on your circumstances.
Some mortgage providers will only allow one or two buy to let mortgages, while others will allow more on certain conditions, such as the properties being located in different areas to reduce risk. You may find a lender that has no such restrictions, providing you can provide the necessary deposit and can assure that the rental income will cover the mortgage costs.
Again, how much rental income you’ll need for your mortgage will depend on the lender, as some are happy to lend with only 125% of the rent while others require up to 150%.
What you need for a Buy to Let mortgage
Once you’ve done some initial research into the type of property you want to buy, and the areas where you anticipate purchasing, you can consider your budget and how much deposit you can put down. This will enable you to compare the best buy to let mortgages before you apply. When you’ve made a decision about whether you want to proceed, you’ll need to gather a few documents in preparation for your application.
Buying a property to rent out to tenants has similarities to buying a residential property, but there are some differences to be aware of. So, what do you need for a buy to let mortgage? Before taking out a mortgage for a buy to let property, you will need to:
- Have a deposit of at least 20%
- Be buying a property with tenants in mind
- Understand the state of the rental market in the location you’re buying in
- Have made the decision whether you’re going to manage the property yourself or use a letting agent
- Have a plan in place for how you will pay off the capital at the end of your mortgage term
Most lenders will have a minimum personal income requirement of around £25,000, but while personal income is an important factor, lenders will typically be more interested in how much rental income the property will generate.
As part of the buy to let process, lenders will carry out affordability assessments. This will include looking for evidence that the property will be able to generate enough rent to stretch to at least 125-145% of the monthly repayments.
There’s less paperwork involved with a buy to let mortgage than a standard residential mortgage, but there are still documents required that you will need to have prepared. These include:
- Proof of income, which is typically the last 3 months of payslips
- Mortgage statement for your existing property
- Proof of rental income
- Proof of deposit, including written evidence if your deposit is coming from a donor
- Proof of bonuses and commission
- Proof of ID, such as a passport or driving license
- Proof of address
- Most recent P60
- SA302 tax return forms if you’re self-employed
Since some of these forms can take several weeks to be issued, such as tax forms, it’s worth gathering these documents in advance of your application to help speed up the process as much as possible.
How much is stamp duty on Buy to Let properties?
Stamp duty is a tax levied on property purchases which varies depending on the purchase price of the property. This fee has changed as part of the government’s plan to stimulate the economy, following COVID-19, so how much stamp duty on buy to let properties varies depending on your circumstances.
So, what is stamp duty on buy to let properties? For those buying a property they don’t intend on living in full-time, such as buy to let, there is an extra 3% in stamp duty on the property. There are some exceptions to this ruling though, such as those who have never owned a property before but are investing in buy to let as a first-time buyer.
There is a tiered system for stamp duty on second home and buy to let properties, based on the percentage of the property price:
- 0% – £0-£40,000
- 3% – £40,001-£125,000
- 5% – £125,001-£250,000
- 8% – £250,001-£925,000
- 13% – £925,001-£1.5m
- 15% – £1.5m+
Some properties are exempt from buy to let stamp duty. For example, as shown in the list above, if the property price is less than £40,000 you won’t pay stamp duty. You also won’t pay stamp duty on inherited properties – however, if you inherit a property and then buy another before selling your inherited property, you would need to pay stamp duty on the purchased property.
For those buying an additional property to their main residence, there is a surcharge which applies, meaning you will have to pay a higher rate of stamp duty. This doesn’t just affect buy to let properties in the UK – if you own a home abroad and buy an additional property in England, the higher rate of stamp duty will apply. Stamp duty tax is paid within 30 days of buying a property, but it is usually paid via your solicitor on the day that you complete on your purchase.
Find Out More
If you’re ready to enter into the world of buy to let properties and would like more advice, contact Town & Country Mortgage Services today. Our team of highly trained mortgage brokers can help you find the perfect deal and rate for your needs to help your entry into buy to let go smoothly.
Our expert team is on hand to help you with all aspects of buy to let mortgages, from queries about stamp duty to how much deposit you need, and we can offer guidance to help you find the best mortgage.