Buy-to-Let Mortgages Explained: All You Need to Know

If you intend to borrow money to purchase a property to rent out to tenants, you will need a buy-to-let mortgage rather than a standard residential mortgage.

Whether you want to purchase your first rental property or expand your portfolio, a buy-to-let mortgage can help you invest in a flat or house for rental purposes. Although a buy-to-let mortgage is similar to a residential mortgage, there are some key differences between the two types of mortgages. 

We’ve put together a guide on everything you need to know about a buy-to-let mortgage to help you decide if it’s the right investment option for you.  

What is a buy-to-let mortgage? 

A buy-to-let mortgage is a loan for landlords who want to buy a property to rent out to tenants. So, if you’re thinking about becoming a landlord or you want to grow your portfolio, but you don’t have the money to buy a property outright, you will need to take out a buy-to-let mortgage. 

The majority of borrowers choose an interest-only buy-to-let mortgage so that they only have to pay the interest on the loan each month. At the end of their mortgage term, they then have to pay off the loan balance. Most other buy-to-let mortgages are provided on a capital repayment basis where the landlord pays back some of the loan and the interest each month. 


Can I get a standard residential mortgage instead? 

No, you can’t get a standard residential mortgage if you want to rent out the property. Residential mortgages are for people who intend to live in the property and not rent out rooms to tenants. Mortgage lenders believe there is a higher risk involved with buy-to-let mortgages because your property could be unoccupied for long periods, or you might experience problems with tenants not paying their rent. 

If you take out a residential mortgage and then rent out your flat or house, you could face raised rates or extra charges. Your lender may even decide to repossess your property or demand you pay off the mortgage in full immediately. You cannot let out a residential property without the lender’s consent, and you would be committing mortgage fraud by getting a residential mortgage with the intention of renting out your property. 


What are my buy-to-let mortgage deal options?

There are various types of loans available if you want to purchase a buy-to-let property, such as:

  • Fixed-rate mortgage: With a fixed-rate mortgage, your monthly interest payments stay the same, which means you will always know how much you need to pay each month. This is also good news for your tenants because you won’t have to increase their rent. Whilst there are advantages to not being affected by a rate change, you won’t benefit when interest rates fall. 
  • Tracker mortgage: If you choose a tracker mortgage, your monthly interest rate can fluctuate because it’s based on the Bank of England’s base rate, plus a percentage above this rate. So, if the Bank of England raises or lowers its rates, your mortgage repayments could go up or down.  
  • Standard variable mortgage: Your lender will decide on the rate when you take out a standard variable rate (SVR) mortgage, and they can change the rate whenever they please. But if you decide not to stay on an SVR mortgage, you have the freedom to move onto a better deal at any time. 
  • Discount variable mortgage: A discount variable mortgage has a set discount off the lenders standard variable rate (SVR), but the amount you pay can still change from one month to the next. You also need to be aware that the discounted rate only lasts for a set period, meaning your lender will switch you onto its SVR when your discounted period ends and increase your monthly repayments. 

Each mortgage has its advantages and disadvantages, and the right type for you will depend on your circumstances. 


Should I get an interest-only or repayment buy-to-let mortgage?

We mentioned before that many landlords choose an interest-only mortgage because the monthly payments are lower and only cover the interest owed. Since the monthly payments will not reduce the loan size, you must repay the entire loan when your mortgage term comes to an end. You can pay off the loan using savings, or you may decide to remortgage or sell the property.

With a repayment mortgage, you must pay off the amount you borrowed by the end of the term, so you have to pay back both the interest and some of the loan every month. One of the benefits of a repayment mortgage is that you will own the property outright when your mortgage ends. You will also pay less overall in interest charges. A repayment mortgage could be a good option if you can charge enough rent to cover the monthly mortgage payments. 


Are buy-to-let mortgages more expensive?

They can be. Overall fees tend to be higher, and you generally need to pay a deposit of at least 25% of the total property value for a buy-to-let mortgage because lenders believe they take on more risk. Buy-to-let mortgages can typically be around 1% more expensive than residential mortgages, and the arrangement fees, interest rates and stamp duty rates can sometimes be higher as well.  


How much can I borrow? 

The amount you will be allowed to borrow will depend on several factors, including your borrowing history, your current financial circumstances, the size of your deposit and your expected rental income. Most lenders will require the rental income to cover around 125% of the mortgage payment, but some prefer it to be as high as 145%. 

You can get a better idea of how much rent you can charge tenants by researching similar properties online or talking to a local letting agent. Once you know the rental value, you can then figure out how much you need to borrow. 


What other fees should I factor into my budget? 

The typical fees you can expect to pay are the same as the costs associated with buying a home for yourself, but there are several other costs you need to know about if you want to become a buy-to-let landlord. 

Other costs associated with a buy-to-let property include:

  • Property survey fees
  • Stamp duty 
  • Legal and accountant fees
  • Income tax – on rental income
  • Letting agency fees – only if you choose to use one
  • Buildings insurance
  • Landlord insurance
  • Repairs and maintenance
  • Capital gains tax – should you decide to sell your property

If you’re serious about becoming a landlord, it’s important to consider all of the additional costs you might incur before applying for a buy-to-let mortgage. 


Can you find me a good buy-to-let mortgage deal?

Yes, we certainly can. We know how daunting and time-consuming it can be to sift through hundreds of products and find a buy-to-let mortgage to suit your situation, and this is why we have created our online instant matching platform.

You will need to submit a loan enquiry onto the Pitch 4 Finance platform, and it then finds the most suitable buy-to-let mortgage deal for you by quickly matching your requirements with the best lenders available. Not only does our unique platform produce results in seconds, but it saves you money by finding the best loan option to suit your criteria. You can even talk directly to lenders and complete your loan on our tailored matching platform. 

Also, you get support and industry-leading advice from our friendly team whenever you need it. If you have any questions, you can talk to a member of our team online or call us on 0800 7723 180. But if you’re ready to start comparing the best buy-to-let mortgage deals, you can sign up now and get started for free.