As house prices in the UK continue to reach record highs, and with many individuals being priced out of the housing market, mortgages offer a solution that allows investors to purchase property without the need for a lump sum. While most homebuyers resort to mortgages to deal with the increasing costs, one type of mortgage that is not as well-known is the Buy-to-Let (BTL) mortgage.
While mortgages and property investments can be complicated, proper research can help simplify the process. In this comprehensive guide to the Buy-to-Let mortgage, we will address every question you may have about this type of investment. Whether you want to know how much deposit you need for a Buy-to-Let property, how much you can borrow, the fees involved, the minimum deposit for a Buy-to-Let, or any other related query, we have you covered.
What is Buy-to-Let?
Before we explain how Buy-to-Let works, it is essential to understand what it entails. Buy-to-Let involves purchasing a property to rent out for income. There are different types of Buy-to-Let, such as residential and student properties, each with its own advantages and disadvantages.
Residential Buy-to-Let is the more traditional form of investment, with investors buying a property to rent to any tenant. Student Buy-to-Let, on the other hand, involves renting only to students. Student properties are generally cheaper than residential properties and often have higher rental returns.
Explaining Buy-to-Let Mortgages
A Buy-to-Let mortgage is a type of mortgage specifically designed for investors buying property to rent to tenants. Mortgage lenders are unlikely to offer traditional residential mortgages if the property is intended for rent. Therefore, if you are an investor looking for a mortgage, your primary option would be an investment property mortgage, unless you intend to purchase the property outright.
Who Are Buy-to-Let Mortgages For?
Buy-to-Let mortgages are for those interested in purchasing a property to rent to tenants. These mortgages can be used by both beginner and seasoned investors, but they come with more regulations than a typical residential mortgage. You will need to have the money at hand to pay a sizeable deposit, and the buy-to-let minimum deposit is usually around 20%, with some lenders requiring up to 40%.
How Do Buy-to-Let Mortgages Work?
Most Buy-to-Let mortgages are interest-only, meaning investors pay only the interest on the loan every month. When the mortgage term ends, investors must repay the original loan, also known as the capital debt, in full. Additionally, Buy-to-Let mortgages are typically more expensive, with higher fees and interest rates. The minimum deposit required is also higher, usually 25% or more, and most Buy-to-Let mortgage lending is not regulated by the Financial Conduct Authority.
What Is the Difference Between a Buy-to-Let Mortgage and a Residential Mortgage?
Unlike traditional residential mortgages, Buy-to-Let mortgages are typically interest-only. This means that you only pay the interest on the original loan every month, and your payments do not reduce the overall amount you owe, known as capital debt, unless you make extra payments or take out a repayment mortgage.
At the end of your loan term, you must pay off the debt. You can make payments throughout the period to reduce this cost or sell the property at the end. Alternatively, you could take out another mortgage instead of selling.
Who Can Qualify for a Buy-to-Let Mortgage?
To secure a buy-to-let mortgage, you must have a minimum annual income of £25,000 and a good credit score (if based in the UK). Most lenders also impose an upper age limit of 70 to 75 years by the time the mortgage term ends. Therefore, if you take out a 25-year mortgage at the age of 40, it will expire when you turn 65.
It’s essential to understand the risks associated with property investment. Property is considered one of the safest asset classes, with consistent price growth over the past two decades. However, every investment involves risks that must be acknowledged.
One reason why buy-to-let mortgages require a high minimum deposit is because of the potential for void periods. These periods occur when your property is vacant, and you're not earning any rental income. To mitigate this risk, it's crucial to research potential locations carefully. Investing in popular cities like Liverpool and Manchester and selecting properties that appeal to your target tenant is vital for success.
Affordability Checks for Landlords
To regulate the buy-to-let market, the Bank of England has imposed stricter affordability checks on landlords. Interest cover ratios (ICR) are used to determine the level of profit a landlord can make. This ratio is calculated by assessing if a property's rental income can cover the mortgage payments using a representative interest rate of around 5.5%. Lenders test 125% of the potential income, which means your income must be at least 25% higher than your mortgage payments. Sometimes this number can be as much as 45% higher.
How Much Deposit Do You Need for a Buy-to-Let Mortgage?
Typically, buy-to-let mortgages require a deposit of 25%, although this can vary between 25-40%. Therefore, if you're buying a property valued at £296,422 (the UK average), you'll need a deposit of anywhere between £74,105 to £118,569. Buy-to-let mortgages are generally more expensive than traditional residential mortgages, with higher deposits. This is because lenders aim to protect themselves from the possibility that investors cannot make payments due to void periods.
What Are the Different Types of Buy-to-Let Mortgages?
Now that you know the basics of a buy-to-let mortgage, let's look at the different types of mortgages available:
Fixed-Rate Mortgages: This type of mortgage has an interest rate that remains constant for a set period between two to ten years. Fixed-rate mortgages are popular because monthly payments are predictable and easier to manage. However, re-mortgaging during the fixed-rate period can incur early repayment charges (ERC).
Variable Rate Mortgages: In this type of mortgage, interest rates fluctuate periodically, often based on other rates such as the Bank of England. The standard variable rate differs between lenders, and they can change it anytime. These rates can vary from 2% to 5% and sometimes even higher. It's essential to compare different lenders before deciding on a variable rate mortgage.
Capped Rate Mortgage: A capped-rate mortgage limits how high the standard variable rate can rise.
Discounted Mortgage: This type of mortgage offers a discounted variable rate on the standard variable rate for a set time.
Tracker Mortgage: A tracker mortgage offers variable rates that follow the Bank of England's base rate at a set percentage either above or below it.
What Are the Interest Rates for a BTL Mortgage?
As of January 2023, lenders are charging upwards of 4.29% for a 2-year fixed buy-to-let (BTL) mortgage and 6.99% variable, which is a noticeable increase compared to previous years. In late 2020, for instance, the average rates for fixed-rate mortgages were around 3.10%, while for variable rate mortgages, they were 3.44%. However, the Homeowners Alliance predicts a sharp increase in BTL mortgage rates for 2023 due to the Bank of England's signal of further interest rate rises. Hence, it is crucial to compare mortgage lenders and take the time to investigate all rates before making a final decision.
Buy to Let Mortgage Calculator
To obtain accurate figures on what you could expect to pay monthly for a BTL mortgage, be sure to check out the top buy-to-let mortgage calculator or BTL mortgage calculator available online. The calculator allows you to determine how much you can borrow based on the property's value, the length of the mortgage, and the interest rate. Additionally, you can estimate your monthly mortgage costs based on your deposit and interest rate.
At Magnate Assets, we offer a fantastic rental income calculator tool that calculates the rental income you need to afford your property mortgage.
What Are the Tax Implications of BTL Mortgages?
Investing in a property entails various expenses that go beyond making mortgage payments. Besides that, you have to keep in mind capital gains tax, income tax, and stamp duty tax, among others. Though BTL mortgages offer some tax relief, it is not as beneficial as it used to be. Changes have been made since 2017, and the tax advantages attached to BTL mortgages have been limited. Moreover, the way landlords declare their rental income has also changed.
Since April 2020, investors can no longer deduct mortgage expenses from rental income to reduce their tax bills. Instead, they receive a tax credit based on 20% of their mortgage interest payments. This lack of tax relief has led some landlords to create a limited company. By buying property as a company, investors can benefit from significant tax advantages compared to individual landlords. However, the interest rates are often higher for companies than individuals.
Portfolio landlords are those who own four or more properties. Although you may encounter some difficulties when applying for extra finance, top slicing can be beneficial. If you have a large and comfortable salary, you can use your income to bridge shortfalls when being assessed by lenders.
Before October 2017, portfolio landlords only had to provide profit and loss figures when attempting to re-mortgage their properties, but this is no longer the case. Instead, more checks are now in place, such as showing several aspects of your portfolio like mortgage details, your business model, and cash flow projections for each property in your portfolio.
As a portfolio landlord, you may face some restrictions, depending on the lender you want to borrow from. Some lenders have implemented restrictions on the number of properties you can have in your portfolio, typically up to 10. This can impact the ICRs and their interest rate, meaning you need a higher income to secure a mortgage. Moreover, you may find limits on maximum loan-to-value ratios and even a requirement that your ICR must be over 100% on each of your properties. Due diligence and research are required to ensure you choose the right mortgage for you.
First Time Buyers
It may surprise you to hear that you can secure BTL mortgages even as a first-time buyer. However, it is not easy, and lenders may command an even bigger deposit to secure a mortgage. Additionally, the number of willing providers is far less than normal. Although first-time buyers usually get stamp duty cuts on their first purchase, this only applies to homes they intend to live in, and they miss out on tax benefits.
On the plus side, they won’t pay as much as ordinary investors would on buy to let properties and will instead be given a home mover rate charge (the same rate as non-first-time buyers purchasing a property to live in). As a first-time buyer, your actions as a landlord will impact your ability to secure a mortgage for a home you intend to live in. Lenders will assess your debt and payments on your BTL mortgage, so be sure to prepare yourself financially.
Buy to Let Equity Loan
If you’re a first-time buyer looking to invest in property in England, a buy to let equity loan might be a suitable option for you. It allows wannabe homeowners to borrow up to 20% of the property value with a 5% deposit.
How to Find the Best Deal
When it comes to choosing a buy-to-let mortgage, the sheer number of options available can be overwhelming. However, conducting thorough research is crucial. One of the main factors to consider is the mortgage fees, which can significantly impact the overall cost.
There are several types of fees associated with buy-to-let mortgages, including:
Arrangement fees: These fees are charged by lenders for setting up your mortgage and can range from free to £2,000.
Valuation fees: Lenders typically conduct a valuation on your property to ensure that it's worth the price you're willing to pay.
Legal fees: These fees cover any legal proceedings involved in setting up the mortgage or switching your deal.
Other crucial considerations include early repayment charges (which may be incurred if you pay off your mortgage early by moving home or re-mortgaging), cashback incentives, and the annual percentage rate of charge (APRC).
To ensure you're getting the best deal available, consider using comparison sites or talking to lenders directly. With some research and due diligence, you can find the right buy-to-let mortgage for your investment goals.
Start Your Property Journey with Magnate Assets
We hope you enjoyed our guide to buy to let mortgage explained and buy to let criteria. If you wanted to know how much deposit you need for a buy to let or wanted buy to let mortgage explained simply and understandably, then this guide has been for you.
The deposit required for buy to let mortgages is around 25%, however, the deposit needed for buy to let can go anywhere up to 40%, so be sure to have that money ready if you’re looking to invest in property with a mortgage.
The buy to let deposit required can change per property, with some deposits as low as 15%! Fewer investors are using buy to let mortgages now, and with such great deals on off-plan property, it’s easy to see why. Mortgage and property can be complicated, but it doesn’t have to be with us.