If you’re planning to purchase a property to rent out instead of living in it yourself, a standard residential mortgage won’t be sufficient. In this case, you’ll need a buy-to-let mortgage, which is tailored specifically for property investors.
This guide covers:
- What a buy-to-let mortgage is
- How it works
- Types of buy-to-let mortgages
- Eligibility criteria
- Deposit and borrowing requirements
- Interest rates
- Frequently asked questions
What Is a Buy-to-Let Mortgage?
A buy-to-let mortgage is a type of loan used to purchase residential property intended to be rented out to tenants. You can apply if you:
- Are buying a new investment property
- Plan to let out an existing property
- Are letting out a holiday home
- Have inherited a property and become an “accidental landlord”
How Does a Buy-to-Let Mortgage Work?
Buy-to-let mortgages function similarly to residential ones but with several key differences:
- They are often interest-only, meaning your monthly payments only cover the interest
- The loan principal (capital) must be repaid in full at the end of the term
- A larger deposit is usually required, typically 25% or more
- Income and rental yield criteria are more stringent
While interest-only options reduce monthly costs, it’s crucial to have a repayment strategy in place—such as selling the property or using savings.
Types of Buy-to-Let Mortgages
- Interest-Only: You pay only the interest; the capital is repaid at the end
- Capital + Interest: Monthly payments include both interest and a portion of the capital
- Fixed Rate: The interest rate remains constant for a set term
- Standard Variable Rate (SVR): The lender can change the rate at any time
- Tracker: Follows the Bank of England base rate, so payments can rise or fall
Who Can Apply?
Lender requirements vary but generally include:
- Age between 21 and 75 (some lenders accept from 18+)
- Proof of property ownership
- A good credit score
- Annual income of at least £25,000–£30,000
- Rental income that covers 125%–145% of monthly mortgage interest
Deposit Requirements
Buy-to-let mortgages typically require a minimum deposit of 25%. If you can offer 40% or more, you may qualify for better rates.
Borrowing and Affordability Criteria
Because buy-to-let is considered higher risk, lenders apply stricter affordability assessments:
- Rental income must meet the interest coverage ratio (ICR)
- Income must be 125%–145% of monthly mortgage payments
- Lenders apply stress testing to assess how rate increases might affect repayments
- Your credit history and annual income influence how much you can borrow
Interest Rates
Buy-to-let interest rates are generally higher than those for standard residential mortgages due to increased risk. Factors affecting your rate include:
- Credit score
- Size of your deposit
- Mortgage term
- Property location and potential rental yield
Some mortgages include high arrangement fees, so be sure to compare the total cost, not just the interest rate.
Additional Costs
Be prepared for additional expenses such as:
- Letting agency fees
- Valuation and solicitor fees
- Land Registry fees
- Stamp duty
- Landlord insurance
- Maintenance and repair costs
Frequently Asked Questions
Is Buy-to-Let Cheaper Than a Residential Mortgage?
Not usually. Interest rates and fees are higher. However, interest-only options mean monthly payments may be lower—but you still need to repay the capital eventually.
Can I Live in My Buy-to-Let Property?
Generally no. These mortgages are intended for rental purposes only. Living in the property without lender approval can breach your agreement. Some lenders may allow short-term exceptions with prior permission.
Can I Sell a Property with Sitting Tenants?
Yes, you can sell a buy-to-let property with tenants in place. In fact, this may appeal to other investors. The existing tenancy agreement must remain in effect until it ends.
Thinking about becoming a landlord or growing your investment portfolio? Get in touch with Piccadilly Estates to explore buy-to-let opportunities across London and the UK.
Reference: MSN Blog
