What is a Buy to Let mortgage and how does it work?

Residential mortgages are loans that you take out on a property that you want to live in. If you’re buying a property with the intention of renting it out, not living in it, you’ll need a Buy to Let mortgage.

Who can get a Buy to Let mortgage?

Anyone could get a Buy to Let mortgage. Most lenders will want you to own a residential property before they’ll let you Buy to Let. That is because they want to make sure that you’re not going to live in it.

That said, there are some lenders that will lend to First Time Buyers. It may be that someone has never actually owned a property. Maybe they live with a partner that already owns a home. They don’t want to buy a property for themselves to live in, so they might buy an investment property as a Buy to Let. A number of lenders will allow that.

You usually need a 25% deposit to get it whether you’re borrowing in a personal name or in a limited company. A limited company has to be set up ready to buy the property and the borrowers need to be the directors of the limited company. Some people do it that way because it can have tax advantages.

How much can I borrow on a Buy to Let mortgage? What deposit do I need?

Usually, you need a 25% deposit – that’s 25% of the value of the property you’re looking to buy. Some lenders were doing it with a slightly smaller deposit of 20%, but there are not many in the market at the moment. The rates are really high on those too, so you’re better off if you’ve got a 25% deposit or more.

A residential mortgage lender looks at your personal circumstances – your income and your outgoings – to see how much they think you can afford. With a Buy to Let mortgage, it’s more about the deposit and the potential ‘monthly rental yield’ from that property you are looking to buy.

Each lender has different calculations and different criteria, but they concentrate on the monthly rent you can achieve from that property. That will determine how much you can borrow.

So it is quite complicated, which is why it’s always a good idea to work with a mortgage broker. We understand which lenders have the most relevant criteria so we can give you all the options.

Can I let a property with a residential mortgage or can I live in my own Buy to Let property?

It’s against the mortgage conditions and the terms from the lender if you rent out a property without a Buy To Let mortgage or live in your Buy to Let property.

However, you may ask your lender to change the status of your mortgage if your circumstances change. Let’s say you’ve got a residential mortgage on a property that you’ve lived in for a while and perhaps you’re moving away with work. You can explain this to your residential lender that you like to rent the property out for a period of time.

It’s up to the lender whether they agree or not, but in some cases, they will give you Consent to Let. This is effectively an agreement that you can rent out your property even though it’s on a residential mortgage.

A property with a Buy to Let mortgage needs to be rented out on a tenancy agreement. You can’t live there.

Should I choose interest only or repayment on a Buy to Let mortgage?

Most Buy to Let mortgages are interest-only mortgages. That means that each month you’re only paying the interest, and the debt you’ve secured on that property remains the same.

An interest-only mortgage has much lower payments each month than a repayment mortgage. So it depends on your objectives on buying the Buy to Let property. If you’re looking to use the rent each month to repay the mortgage, you might be better off on a repayment scheme. Whereas, if you’re less interested in the mortgage being repaid and are looking for profit each month, you might be better off on an interest-only basis.

How many Buy to Let properties can I own?

You can own as many properties as you like depending on lenders. Some lenders will limit your Buy to Lets to just three, while others will let you have more or an unlimited number. These tend to be the more specialist lenders.

What costs are involved with a Buy to Let mortgage?

Fees are slightly different to residential. They can be a little bit more costly than residential. Some lenders set their arrangement fees at a percentage of the loan. Alternatively, standard fees are around £1,000.

When remortgaging, some lenders will offer free legal – free solicitors for a straightforward remortgage – and free valuation. But with Buy to Let not everyone does that. Some may offer cash back, some might not offer free valuation so they are a little bit different there.

What do I need to consider before I commit myself to a Buy to Let?

If you have the opportunity to borrow against your own residential home, that’s usually cheaper than against a Buy to Let, because mortgage rates are higher. Arrangement fees are going to be high because often they are calculated as a percentage of the amount you’re borrowing.

Many people want to have flexibility about how they let a property. They may decide to sell it. With a mortgage secured on the property, you are going to have to follow the conditions of your mortgage. If you’re in a fixed rate you might need to keep hold of that property for that period. So it depends on your circumstances as to whether Buy to Let mortgage is the right way to go.

What else should I consider with a Buy to Let remortgage?

The other thing to be aware of is the type of property that you’re remortgaging and specifically the energy performance (EPC) rating. The EPC rating on individual properties is key for Buy to Let. That needs to be an E rating or above at the moment and is due to change in a few years’ time. Lenders do check to make sure that it is E and above because that’s the required standard from the government.

Again, we will help you with this. We know all the Buy to Let lenders out there. You might not have used a mortgage broker before – you may have gone to your bank for the mortgage on your own home. But Buy to Let mortgages are not commonly available on the high street and many lenders will only sell via brokers. We have the expertise, access to the deals and knowledge to help.