Buy-to-let

A buy-to-let mortgage is used when you intend to rent out a property rather than live in it yourself.

Buy-to-let mortgages are assessed differently from residential mortgages and are usually based on:

• Expected rental income
• Loan-to-value
• Your personal financial position

You should always seek independent accountancy advice to understand the tax consequences and options of buying a Buy to Let property.

Buy-to-let mortgages and residential mortgages are essentially a loan used to purchase a property. However, if you do not plan to live in that property and instead would like to rent it to a tenant, you will need a buy-to-let mortgage.

Lenders consider tenanted properties to be a higher risk, and typically charge higher rates for mortgages if the property is used in this way. If you would like to purchase a property to rent out, you will need to be able to pass specific eligibility criteria and have a deposit of at least 20% or more of the property price.

Unlike residential mortgages, buy-to-let mortgages are normally interest only rather than repayment. You benefit from lower monthly payments than with repayment mortgages, but you must be able to repay the capital in full at the end of the mortgage term. If you plan to sell the property to pay this capital, you must have a plan if the property value has dropped.

The fees associated with taking out a mortgage also tend to be higher for buy-to-let mortgages.

You should always seek independent accountancy advice on the best way to repay your buy-to-let mortgage and to understand the tax consequences and options.

With standard residential mortgages, a lender will assess your income and expenditure to determine if you can afford the mortgage payments. For buy-to-let mortgages the lender will look at different criteria. You may still need to be earning above a minimum criteria, but the mortgage application will be less focused on you and your circumstances, and more focused on the expected rental income.

In simple terms, the mortgage lender will expect a minimum rental income of between 125% and 145% of the total annual mortgage payment assuming a pre determined stress rate applied to the mortgage, depending on your income tax status.

The stress rate is normally higher than the initial rate of the mortgage and is designed to ensure that the mortgage remains affordable should interest rates rise.

Our advisors are here to help you through the myriad of options in the BTL mortgage market and advise you on the right lender and rate for your investment property.

Typical minimum criteria for buy-to-let mortgages include:

• A deposit of at least 20% of the property value, although you will find better deals if you have a larger deposit.
• A minimum rental income of 145% of the interest only mortgage payment.
• Earnings of more than £25,000 per year (a few lenders will consider applicants with less income than this).
• A good credit record without excessive additional borrowing on credit cards and other mortgages.
• If you are an existing property investor; a summary of the properties values, outstanding mortgage balances, monthly mortgage payments and monthly rental income.

Most buy-to-let mortgages are not regulated by the Financial Conduct Authority (FCA).

However, a buy-to-let mortgage may be regulated if:

• The property is, or will be, let to a close family member

• The arrangement meets the definition of a “consumer buy-to-let”

We will confirm whether your mortgage is regulated or unregulated before you proceed.

You should not live in a property financed by a buy-to-let mortgage unless your lender has explicitly agreed.

Living in a buy-to-let property without lender consent:

• May breach your mortgage terms

• Could lead to serious consequences with your lender

If your circumstances change, you should always speak to your lender or advisor before taking any action.

Most buy-to-let mortgages require a minimum deposit of around 25%, although this can vary depending on:

• Rental income

• Property type

• Lender criteria

• Your overall financial position

Higher deposits can sometimes provide access to more competitive rates.

A few lenders will accept deposits of at least 20% of the property value.

Buy-to-let affordability is usually based on:

• Expected rental income

• A lender’s required interest coverage ratio (ICR)

• Stress testing at a higher interest rate

Some lenders also consider your personal income, especially for first-time landlords.

Stamp Duty Land Tax (SDLT) rules for buy-to-let properties differ from standard residential purchases.

In England and Northern Ireland, additional residential properties are normally subject to a higher rate of SDLT.

Stamp duty rules:

• Vary by country (England, Scotland, and Wales use different systems)

• Change over time

We recommend checking the latest rules on GOV.UK or discussing this with your advisor.

Buy-to-let involves risks, including:

• Periods without tenants

• Changes in interest rates

• Property maintenance costs

• Tax and regulatory changes

It is important to understand both the benefits and the risks before proceeding.

A mortgage broker can:

• Identify suitable buy-to-let lenders

• Explain whether your mortgage is regulated

• Assess rental affordability correctly

• Help structure borrowing for portfolio landlords

A whole-of-market approach allows access to a wide range of buy-to-let lenders.