Buy To Let
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Buy To Let Mortgages
What is a Buy to Let mortgage and how does it differ from a regular mortgage?
There are a few differences. The first one is the purpose – a residential mortgage is used where you are occupying the property as your main residence, a holiday home or a second home. It’s for your use. A Buy to Let mortgage is absolutely not for your use. In fact, it’s written in the conditions that you’re not supposed to live in the property.
There are two types of Buy to Let mortgage – regulated and unregulated. A regulated one is a bit less common, where you are allowed to have a family member live in the property, but most Buy to Let mortgages are unregulated. They are for property bought as an investment, that will be let out.
You will be collecting rent on that property so it’s an investment – through a surplus each month, where your outgoings including the mortgage are less than the rental income. Or, you might be more focused on capital growth, where you might buy a property at £200,000 for example, and 25 years later you sell it at £300,000.
The mortgages differ in how they are underwritten, how affordability is assessed and the repayment basis. The vast majority of residential mortgages are on a repayment basis where the debt is coming down bit by bit. Buy to Let mortgages are often interest-only, so you’re not repaying the debt and the balance is staying the same. You’re just covering the interest costs. This has tax advantages and can support your future goals.
What are the eligibility criteria for obtaining a Buy to Let mortgage?
The main one is that lenders prefer you to be a homeowner. It’s not impossible if you don’t own your own property, but lenders may be concerned about you taking a Buy to Let mortgage and living in the property.
The other key criteria is affordability. Most of the underwriting and affordability process is based upon the rental income of the property, so understanding that value is really important. Many lenders will want you to earn a certain level of income, but it’s not your salary that determines how much you can borrow.
How much deposit is usually required for a Buy to Let mortgage?
[podcast recorded in January 2024] Since interest rates have gone up over the last two years, you now need a 25% deposit. There are a few lenders out there that will take a 20% deposit, but you do pay more on the rate for that.
It comes back to affordability. You’ve got to have a very good rental income on the property you’re going to buy to get that kind of loan to value.
Rental incomes have gone up considerably in the past year but not at the same speed as interest rates. So it’s becoming more and more difficult to get 75% loan to value, 25% deposit mortgages.
It’s not impossible, and there are things we can do to increase that. But once we know the rental income, you might need to put down 28% or 32% deposit. We work backwards once we know the rental income – we can tell you what the maximum you can borrow is and the deposit you’ll need to put down.
Should I choose interest only or repayment on a Buy to Let mortgage?
Most people will go interest only, but some do repayment. The affordability calculators lenders use are based upon interest only payments.
If they use the same calculator for a repayment mortgage, that is helpful. Some may use the repayment figure, which means it’s much more difficult to borrow the amount you require.
The reason to do one or the other depends upon your goals. Any kind of investment should be considered as medium to long-term. As you approach retirement, would you want to continue to own these properties and generate income? If so I would suggest a repayment mortgage or an interest-only mortgage that you’ve overpaid.
If you can get into retirement with that debt gone, all of that rental income is yours. It’s a great supplement to your income.
But many people buy when they’re 30-40 years old and want minimal commitments each month by keeping interest only payments low. The rent covers your mortgage, repairs, renewals and agent fees.
You might buy a property and sell it when you come to retirement, making perhaps £100,000 profit – so whether you intend to retain the properties into retirement or not is a key factor.
With interest only, because the balance is always higher, you’re always paying more interest. That sounds bad, but it does maximise your tax position. The smaller the mortgage you have outstanding, the less cost you have to offset against rent. More profit means more tax… so it is all decided on an individual basis. We’d have that conversation about your goal, but most people tend towards interest only.
What are the current interest rates for Buy to Let mortgages?
Most of the high street lenders that offer residential mortgages also do Buy to Lets. Although it is commercial or at least semi-commercial lending, if they ever repossessed that property they can sell it as a straightforward home. The security is no different than for a residential mortgage.
Because of that, Buy to Let rates are very close to residential rates and far cheaper than any other kind of commercial mortgage you would get on a factory or a medical practice.
You do pay a little bit more because, according to lenders, if you have a Buy to Let mortgage and a residential mortgage and only enough money to pay one of them, you will pay the mortgage on the roof over your own head first. So it does carry a slightly higher risk to the lender and they will charge between 0.5% and 1% above a residential rate.
In recent months, higher interest rates mean they can’t lend as much on a Buy to Let. They have to stick to their affordability calculators – they’re regulated to do so. So they’ve been lowering the rates – and some Buy to Let rates have become cheaper than residential rates so that people can maximise the borrowing.
To make a profit, they charge large arrangement fees. On a residential mortgage your arrangement fee would typically be £1,000. One lender recently had an arrangement fee of 9% of the loan – that’s massive. But for customers that want to borrow the maximum amount, that arrangement fee isn’t part of the affordability calculation. They trade one off against the other. So if you see very low Buy to Let rates, it’s not necessarily what it seems.
We will do all the sums. What’s the total cost over five years? Is one with a bigger arrangement fee better than one with a smaller fee? It depends on how much you’re borrowing. We might recommend a lower rate with a higher fee purely to get you the borrowing you want. If you have more deposit, we can access slightly better rates with smaller fees – we’ll recommend a suitable approach for your situation.
What is rental coverage and how does it affect Buy to Let mortgage applications?
It’s not just about the rental income. There are three key areas – one is the length of the fixed rate, as lenders have different calculations if you’re fixing for less than five years. For five years and longer you will have stable payments, so they don’t have to stress test so strongly. Even if rates are higher in five years, the rental income would also have gone up.
Secondly, some lenders are regulated by the Prudential Regulation Authority (PRA). High street lenders have been regulated since the financial crisis of 2008, and the PRA have got minimum rental calculations that lenders must use. So while they have better rates, the high street lenders are a little bit more restricted on what they’ll lend.
Smaller building societies and specialist lenders may not be regulated by the PRA. They will push the envelope a bit further, but you pay for that with a higher interest rate.
The final variable is your tax status. The affordability calculations bring in how much tax you will pay. Higher rate taxpayers pay more tax on their rental income than basic rate taxpayers. So somebody who is a basic rate taxpayer, earning less than a high rate taxpayer can actually borrow more on a Buy to Let basis. It’s quite weird.
You can also borrow for Buy to Lets under a limited company, which will benefit from lower tax brackets. A limited company can potentially borrow more as well. But the calculators are quite complex. So we really need to chat – because there are so many variables. The amount you can borrow might differ by as much as £40,000 depending on all of those factors.
Are there any specific fees associated with Buy to Let mortgages that borrowers should be aware of?
The big one is the higher arrangement fees. Buy to Let products will have at least the same arrangement fees as a residential, if not higher. It’s unusual to see residential mortgages with arrangement fees based on a percentage of the loan. They’re normally £1,500 tops.
Higher fees on a Buy to Let are there to maximise your borrowing. When we used to get 75% loan to value it wasn’t an issue, but it has become more challenging. If you want to gear up and borrow the maximum, you are almost certainly looking at higher arrangement fees.
The other key difference on fees is stamp duty. The higher the purchase price, the more stamp duty you pay – just as with a residential. What differs is that when you are buying a second home, you will pay an additional stamp duty bill which is currently 3% of the purchase price. If you are buying a property at £100,000, your stamp duty bill in England and Wales will be £3,000 bigger than if it were your own home.
What factors do lenders typically consider when assessing a Buy to Let mortgage application?
The first one is the rental figure. They will also look at your earned income in case there are odd times without a tenant. That rental figure is the key, however, and it’s their surveyor’s view of the rental figure.
You may feel you could get £800 a month for the property but the surveyor may stop at £750. It’s not unusual to see a surveyor value up the purchase price but disagree with a customer’s rental figure. They allow for the fact that you might drop the rent to get a tenant quickly.
Lenders also assume you are letting under an assured shorthold tenancy agreement – the standard way to rent properties from a landlord or letting agent. They don’t like other kinds of rental agreements like corporate lets or long-term lets to local authorities.
It all comes back to the property being able to pay its own way. A rental income of £800 a month is enough to cover a £450 mortgage, plus agents fees, tax, repairs, renewals and rental voids – that’s the calculation they’re doing.
How can I find the right Buy to Let mortgage deals?
The first thing is to find the right property, which goes back to your goals. If monthly profit is your key goal, you want a property that’s getting a good rental yield and minimal rental voids.
Location is key. If it’s near a hospital there’s always going to be a good supply of tenants who want to live near their place of work. Demand is important too. If you’re looking at a two-bedroom flat, and there are thousands of flats in that area, it could be more difficult.
The reasons to buy a property to live in are different to the reasons to buy a property to rent. It’s all about the demand for that property.
If your goal, however, is capital growth, you might look at different areas of the country where growth is strong. That might be London, for example, but obviously you’re starting at higher prices. In other pockets of the country, prices are relatively stagnant and you’re not going to see capital growth there.
Do your research, because getting the right property to meet your goals is so important. Speak to letting agents before you’ve bought a property. If you’re thinking about buying a two-bedroom flat, they might have 18 of them on their books and they’re all empty. That’s a good reason not to buy that flat.
If you were about to invest £100,000 in the stock market, you would do a lot of research – it’s exactly the same principle. It might affect the type of property you buy or where you buy it. It might be 100 miles away if that’s a good area to meet your goals. If you’re using a letting agent, their job is not just to find your tenants but to arrange tradesmen etc for your tenant. You don’t have to have the property right on your doorstep.
What are the implications of recent tax changes on Buy to Let mortgages?
They’re not quite so recent now. I’ve touched upon one which is the stamp duty surcharge – that’s been around for a few years. That’s irrespective of your tax status.
Changes to the tax you pay on your profit have also been in place for a good five or six years. To oversimplify it, ten years ago if you had a property where you made £10,000 in rental income over the year and you had £6,000 of qualifying expenditure, you just paid tax on the £4,000 profit. You paid that at basic rate if you’re a basic rate taxpayer and at a higher rate if you’re a higher rate taxpayer.
Now, if you’re a basic rate taxpayer it’s the same. It’s changed mainly for the higher rate taxpayers. In that same scenario you would pay 20% tax on the entire rental income and then an additional 20% tax to bring you up to 40% on a profit.
That basically means that on the £6,000 of qualifying expenditure that would have previously been tax free, you’re now going to end up paying 20% tax. So the simple answer is you are paying more as a higher rate taxpayer.
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When can remortgaging a Buy to Let property be advantageous?
It’s the same as residential properties, in that when your rate comes up for renewal, will your existing lender have the best rate? We have to look into that.
Remaining with your existing lender is simple. There’s no underwriting and you simply select a new rate. But a remortgage rate might be better than what your existing lender is offering, providing you meet the criteria based on your current situation.
For landlords looking to own a few properties, who borrowed to the maximum before but now the rental income can get you a bigger mortgage, remortgaging can potentially raise capital. You’ve then got funds to go and buy another property.
We call it gearing up. You may start with two properties but over time as their values and rental incomes go up, you might raise enough deposit to buy a third one – that’s how you build your portfolio up.
Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenant types?
An assured shorthold tenancy is important for mainstream and best rate lenders. But there are different types of letting arrangements.
I’ve got a client, for example, who lets their property to the local authority so they get a guaranteed rent. They don’t know who’s in the property. It could change every month, but the local authority pays them that money on a five-year agreement. Mainstream lenders won’t like that, but other lenders will. Although the return on that is slightly less, the guarantee is quite useful.
There are also short term lettings – holiday letting type mortgages for Airbnb or other websites where you let on a nightly or a weekly basis. We have lenders that mortgage those. They are underwritten slightly differently based on average occupancy over a season.
But they’re a different type of investment property. You should speak to a tax advisor on holiday lets, as they do have certain tax advantages over standard properties. You’ve got less guaranteed rental income, but there are certain tax breaks, certainly for a higher rate taxpayer.
Also, while you are not allowed to occupy a Buy to Let, you are allowed to use your own holiday let. If you buy a property in the Lake District and want to spend a couple of weeks there and let it out for the rest of the year, that’s not a problem on a holiday let basis.
Geographically there aren’t really any issues. The surveyor will be asked if the property is easily lettable. If nobody wants to live in that area, that could cause you a problem but otherwise there aren’t any concerns.
Can I let a property to students?
Student lets typically come under the banner of houses of multiple occupation (HMO). Imagine your normal property – a two-bedroom house. You let it to the Smith family.
But if you’ve got six bedrooms, you could let that to six individuals. There’ll be a communal kitchen, communal living area and then each bedroom has a lock on its door. Plenty of lenders will mortgage those. Rates are slightly higher because they’re not quite the residential properties that lenders normally lend to, but they are classified as Buy to Lets and we can absolutely do those as well.
What are the potential risks involved in investing in Buy to Let properties?
Your capital returns are based on property growth, which is why you shouldn’t really view Buy to Let property as a short-term investment. While there have been certain periods of the last 20 years where you could have made a lot of money in just two or three years, it doesn’t always work that way.
If you’re looking at the long-term, generally there won’t be an issue. From a short-term point of view, the risks are generally to do with rental voids, between one tenant leaving and another one coming, you’re not getting any income. You will want funds to cover that off.
What’s worse are bad tenants. If people in your property are not paying you it can be a lengthy process to get them out. You can buy landlord protection policies to cover legal fees to help you get them out more quickly. The lender’s not really going to listen to you if you’re not getting the rental income – it’s still your obligation to pay that mortgage, whether you’re receiving the rental income or not.
What are the current trends and market outlook for Buy to Let properties in the UK?
It’s a very interesting market right now. A report on London recently said that the number of landlords buying with mortgages had dropped considerably, because affordability is tighter. You need to put bigger deposits down.
But the number of landlords buying for cash has gone up considerably, because rental returns are going up hugely now. It doesn’t mean you should buy a property without a mortgage – it’s just more difficult to gear up to the maximum 75% loan to value.
It is an attractive form of investment, as another article found that rental incomes over the last calendar year had gone up by 15%. You’ve only got to look at the news to see tenants saying that their rent is increasing, with landlords having to pass on the costs of higher interest rates to their tenants.
If you’re relatively low geared on a property and your rental income goes up by 15% in a year, that’s an attractive investment.
Many landlords bought when rates were low and as higher rate taxpayers they were enjoying the lower tax brackets. Those longer term landlords have been leaving the market – while property values are still relatively high, they don’t like their tax position. This has resulted in a declining stock of rental properties.
So if you are a landlord and you lose a tenant and put another one in, it’s not unusual to see a massive uplift in the rent you can get on the property. Plus, I had one client that put a property on the rental market and the next morning had 38 enquiries for it.
People are desperate to get in a property before those rentals go up even more, so the risk of rental voids between tenants is diminishing with the demand for rental properties.
So the risks are diminishing in the Buy to Let market. The downside is the cost of borrowing, but that is also improving. It’s a lot better than it was six or eight months ago.
Are there any government schemes or support available specifically for Buy to Let investors?
Not really. During Covid there was assistance for landlords whose tenants were unable to pay because they lost their job or couldn’t work. That’s now ceased.
If anything, the government is going the other way, with higher tax policies and stamp duty policies on Buy to Let. I would argue it’s getting slightly more difficult.
How important is property management with Buy to Let mortgages?
You don’t have to have a letting agent managing your property but I would recommend you use one, at least for the vetting and finding of tenants. Most letting agents have two levels of service. They will vet tenants for you and underwrite them, but you collect the rent and manage the property yourself.
Or they will do the vetting, collect the rent and become the point of contact for the tenants if the boiler breaks down or the window isn’t closing. There’s an additional monthly cost for that, but if you’re operating properties from some distance away or you’re busy working, do you want a call from your tenants at three o’clock in the morning about the electricity supply?
Shop around for an agent, because you may get a difference in fees. Also, if you’re going down the route of buying several properties, you might be able to negotiate a group discount with that agent.
What are the consequences of defaulting on a Buy to Let mortgage?
It’s the same as a residential. Any missed mortgage payments will show up on your credit report. That can impact your ability to get credit elsewhere – for another mortgage or even something like a mobile phone contract.
You want to minimise the chances of that happening – the best way is to have a slush fund. You expect to have a Buy to Let property that’s paying for itself, but there will be months that you will have to cover a gap between tenants or a tenant not paying.
The other thing is that when your rate comes up for renewal, if you are in arrears it will be difficult. Even if you have cleared the debt, remortgaging elsewhere will be challenging. With most lenders, so long as you’re not in arrears with them at the time of your rate coming up, you can have another rate with them.
If you are more than three months in arrears, a lender will start repossession proceedings. You could lose your property. If you’ve put a big deposit into that property, you probably won’t get back what you put in – so you really don’t want a repossession.
How can I add properties to an existing Buy to Let portfolio?
The affordability element can vary from lender to lender. I’ve expressed the importance of affordability calculators.
Lenders use the term ‘Portfolio Landlords’ for those with four or more Buy to Let properties with mortgages. If you’ve got 10 properties but only two of them have mortgages, you actually wouldn’t be deemed a portfolio landlord.
For portfolio landlords, lenders have to go into more depth in the underwriting. They have to assess the whole of your portfolio when you want a new mortgage. If you found a perfect property but your portfolio is not meeting certain criteria, they could technically still say no.
Some lenders treat the properties individually, where each one’s got to stand up on its own, or they may treat them as a collective, looking at total rental income and total outgoings. Essentially, the level of underwriting and the number of questions are more in depth once you become a portfolio landlord.
If you’re going to have large numbers of properties, speak to a tax advisor or an accountant first, but there could be advantages to putting them in a limited company name. The limited company has to be what we call a Specific Purpose Vehicle, set up for letting a property. The company needs a certain SIC code that relates only to property purchase or ownership.
Lenders are prepared to do that. It’s got better tax breaks, but you do pay a little bit more in interest rates so do look at that closely. But having a limited company can be helpful, especially if you end up clearing the debts and passing shares of those companies on to your children.
What steps should a first time Buy to Let investor take before applying for a mortgage?
The first question to ask is whether property investment is right for you. There are lots of other options such as the stock market and savings accounts, so make sure you understand the risk and reward. We can go through that with you.
Your accountant is important to speak to on how it affects your tax position. If you decide that property investment is right for you, speak to your mortgage broker first. The deposit you’ve got is important. Once we know that we can look at certain properties and rental incomes.
Is it better to buy a four bedroom house or a two bedroom flat for the same price? We need to take into account your goals as well. Is it about capital growth or monthly profit?
We do get customers that look at properties first and then ask about the mortgage, but it’s best to start with your broker. You will know what you can achieve with the money you’ve got and see what kind of properties are achievable.
Letting agents can help you see if that’s a good idea – research for a property investment is important and the mortgage broker is a really big part of that.
Please note:
Your property may be repossessed if you do not keep up repayments on your mortgage. The Financial Conduct Authority does not regulate some forms of Buy to Let Mortgage
