How to get a buy-to-let mortgage
Buying a property to rent out can generate a regular income, but requires careful research and planning. Since monthly mortgage payments will be one of the biggest costs eating into your yield, a crucial part of this is getting the right buy-to-let mortgage.
This guide is for you if you're considering taking out a buy-to-let mortgage for the first time.
What is a buy-to-let mortgage?
Buy-to-let mortgages have a lot in common with residential mortgages:
- It's a loan secured on the property – so the property is at risk if you don't keep up with monthly mortgage payments.
- You will need to put down a deposit. This is your capital to invest in the property.
- Different kinds of loan such as fixed rate and tracker mortgages are available.
However, there are some crucial differences:
- Buy-to-let mortgages are regulated differently. They are treated more like commercial loans – so there's no protection if you're mis-sold a loan or given poor advice.
- They're typically interest-only rather than repayment mortgage loans.
- Instead of looking at just your salary, lenders often use the anticipated rental income from the property to decide how much they will lend to you.
- Fees and interest rates tend to be a little higher than mortgages for homeowners.
Compare buy to let mortgages
See today's buy-to-let mortgage rates. Filter and compare to find the exact mortgage you want.
How to get a buy-to-let mortgage
Step 1: Raise the deposit
How much deposit do you need for a buy-to-let mortgage?
Most lenders will require you to put down a deposit of at least 25% of the property's value. If you have this amount, you can look at 75% loan to value (LTV) buy-to-let mortgages.
There are some lenders that offer buy-to-let mortgages with deposits as low as 15 per cent. However, as with residential mortgages, the bigger the deposit you are able to put down, the better the rates you will usually have access to.
The reason for this is clear when you think about buy-to-let through the lens of investment, rather than a mortgage on your own home. Essentially, your deposit is your investment. With buy-to-let, most mortgages are arranged on an interest-only basis. You make your return on that investment by ensuring there's a surplus between the rental income and all your costs, including the mortgage interest. This is why low-deposit buy-to-let mortgages are scarce.
Step 2: Meet the criteria
As well as the size of your deposit, lenders will also take other things into account when deciding whether to lend to you:
- Rental income: The rental income you're likely to earn will generally need to be the equivalent to 125–130% of your monthly mortgage payments. This is to reduce the risk of you defaulting on your mortgage payments if the property stands empty for a period of time. Lenders will want your potential rental income to be verified by independent sources, such as an estate agent.
- Other income: Lenders may require evidence of additional regular income. How much income you'll need will vary from lender to lender, but many will require you to earn at least £25,000 per year from sources other than buy-to-let. This is because you will still need to meet your own living costs, and lenders won't want you to be relying on your rental income to cover emergency expenses.
- Whether you own your home: Most lenders will only consider you if you already own your home (although you don't always need to have paid off your mortgage).
- Your credit rating and history: As with residential mortgages, the lender will check your credit. Unlike residential mortgages, there aren't many deals available for those without a good credit history. Some lenders will be more willing to consider you if you've rented out properties before.
You should be prepared for lenders to ask questions about your monthly outgoings and any current financial commitments, in order to make sure that you could still afford the monthly payments if interest rates rose.
Step 3: Consider the risks of buy-to-let
Before you get a buy-to-let mortgage, consider this:
Buying a property to rent out is an investment, and like any investment there are risks involved. Despite a sharp increase in house prices in recent years, this trend is not guaranteed to continue and prices could fall at any time.
Some of this risk can be reduced by putting down a large deposit when you take out the mortgage, as you will be less likely to fall into negative equity – which is when the value of the property falls below the amount you owe on your mortgage loan.
Here are the main risks to weigh up:
- How you would cope financially if the property were to stand empty for a period of time (known as a 'void period')?
- Would you still be making a surplus if interest rates rose and your monthly mortgage payments increased – or if rents were to fall?
- If the property is not lettable in its current state, what are the costs of getting it ready? Will you be able to meet mortgage payments if this work takes longer or costs more than anticipated?
- Can you afford to keep a cash reserve for property emergencies and repairs? As a landlord you'll be responsible for the property's upkeep, which can be expensive and time consuming – see the guide to buy-to-let investing for more details.
Step 4: Compare buy-to-let mortgages and apply
The good news: in 2015 there is a buoyant market for buy-to-let mortgages. Lenders are actively competing for your business, so there are good deals to be had. At the time of writing, there are over 800 buy-to-let mortgages available.
Of course, this means you have some comparing to do.
Head over to our buy-to-let mortgage table to see today's lowest rates and fees from all available UK lenders. We can show you your likely monthly mortgage payment and you can filter on the features you want.
Compare mortgages by monthly payment amount
Not every buy-to-let investor is comfortable making their own decision on a mortgage – the deals can be complex, and it's important to your overall success to get the right one. If you'd prefer to get a buy-to-let mortgage recommended to you, request a callback from a specialist buy-to-let adviser.
Last updated: 04 December 2015