Buy-to-let

Buy-to-let Mortgages

Buy-to-let (BTL) mortgages are specifically for individuals who wish to buy residential property which they intend to rent to tenants. Although a BTL mortgage is similar in a number of respects to a standard residential mortgage, there are some significant differences between the two.

Eligibility and lending criteria

Most banks and building societies (and some other financial institutions) offer BTL mortgages, but terms, conditions, and costs vary enormously.

Age, income and maximum mortgage-term requirements vary between lenders and depend on individual circumstances.

Flats, newly built property, former local authority-owned properties — or properties that are priced below a certain value — can be unacceptable to lenders. Lenders may also restrict the number of BTL mortgages a borrower can have with them at any one time. Or the lender may impose a ‘cap’ on the total amount of BTL funding they are prepared to advance to a borrower.

Credit record

In common with a standard residential mortgage, the potential lender will take account of your personal credit rating. If you have any unpaid debts or County Court Judgments — or you have failed to make previous or existing loan repayments on time — the lender may not want to take you on as a BTL borrower.

Affordability

When considering their decision to make an advance or not, lenders will also take into account the amount of rent the borrower is hoping to realise from the property. Unlike a standard residential mortgage, most lenders view the property’s rental potential — rather than the borrower’s salary — as the primary source of income for servicing the loan.

Lenders assess rental income against their own affordability and interest-cover requirements. Allow for periods without rent and for repairs as well as mortgage payments.

Deposit

The deposit and maximum loan-to-value depend on the lender, property and your circumstances. A larger deposit may widen the options available.

Interest rate

Because BTL mortgages represent more of a risk for lenders than standard residential mortgages, BTL borrowers tend to be charged higher rates of interest.

BTL mortgages — associated fees and costs

Survey: A surveyor will be appointed (at the borrower’s expense) to assess the property’s condition, market value, and potential rental income. The surveyor will also identify any issues which could affect the property’s future value.

Conveyance: Conveyancing — which is usually conducted by a solicitor or conveyancer — is the process by which the ownership (legal title) of the property is transferred from the seller to the buyer. Buyers should budget for their own legal and conveyancing costs.

Stamp Duty for Buy-to-let property: The purchaser may have to pay stamp duty land tax which is calculated as a percentage of the purchase price of the property.

Other costs: The borrower may also have to pay arrangement and booking fees to the mortgage provider, which tend to be higher than those associated with a standard residential mortgage.

Which type of mortgage?

Depending on the lender, the types of mortgages available to the BTL borrower are usually the same as those available to the standard residential mortgage borrower — i.e., tracker, discount, fixed rate, capped rate, and variable rate.

Given that most BTL borrowers buy for reasons of investment, some mortgage options may be more appropriate than others. With a fixed-rate mortgage for example, the borrower knows exactly what their monthly repayments are going to be; other borrowers prefer tracker or variable rate loans where the monthly repayment can sometimes be lower, but the cost can vary from one month to the next.

(Many BTL buyers have a preference for interest-only mortgages, as distinct to a capital and interest repayment mortgage. An interest-only mortgage is a mortgage where the monthly payments cover interest only; the outstanding capital is due at the end of the mortgage term. A credible repayment strategy is required. Selling the property is one possible strategy, subject to lender acceptance and sufficient sale proceeds.)