Buy to Let Mortgage Explained - What is it and how does it work?

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The rules around buy to let mortgages can be quite tricky to get your head around, so whether you’re a first-time landlord looking to add your first property to your portfolio or just an “accidental” landlord, there are likely many things about buy to let mortgages that you need help clarifying.

Whether you want to know more about buy to let mortgage requirements or you’re wondering how much you can borrow, we’ve put together this detailed guide that should hopefully cover all bases of buy to let mortgages.

What is a buy to let mortgage?

If you buy a property with the intention of renting it out, you won’t be able to fund the purchase with a regular, residential mortgage. Instead, you will need to obtain a buy-to-let mortgage.

This type of mortgage allows you to obtain the funds to buy a house with the sole intention of renting it out, instead of living in it yourself.

How does a buy to let mortgage work?

Most buy to let mortgages are taken out on an interest-only basis, which means for every month of the mortgage term, you only have to pay interest on the loan and not the capital. It can help to minimise your monthly outgoings as a landlord, but it’s imperative that you have a plan in place for the end of your mortgage term so that you can either pay it off in full or remortgage once the term has ended.

Buy to let mortgage criteria

There are several buy to let mortgage requirements you need to bear in mind before you obtain one. 

Are buy-to-let mortgages interest-only?

While it is possible to take out repayment mortgages as a buy to let landlord, most buy to let borrowers prefer to take out interest-only mortgages as it means that they will have fewer outgoings. 

How much can you borrow?

The amount of money that you can borrow with a buy-to-let mortgage depends on numerous factors including how much deposit you can put down, as well as other personal circumstances such as rental income and your credit score. Most buy-to-let lenders usually require you to earn more in rent every month than you repay on your mortgage.

Are buy-to-let mortgages more expensive?

Whether you consider buy to let mortgages to be more expensive than regular mortgages depends on the type of property you plan to rent out and how expensive it is.

Most landlords usually prefer to buy cheaper properties to rent out, but buy to let mortgages usually cost more as they typically have higher interest rates and usually require larger deposits.

Buy to let mortgages for first-time buyers

While it is possible to get a buy-to-let mortgage as a first-time buyer, it’s not always very easy to do so. This is because you usually need a bigger deposit in order to get a good deal and the number of mortgages that will be available to you will likely be much less than normal mortgages.

You will also be giving up some first-time buyer relief benefits such as stamp duty as you can’t get buy to let stamp duty relief.

What size deposit do you need for a buy to let mortgage?

In order to get a buy to let mortgage, you will typically need a deposit of around 20-25% of the value of the property that you want to buy.

Previously, you were able to put down a deposit of around 15%, but landlords who are able to put down a deposit of 40% or above are usually the ones who are able to obtain the best buy to let mortgage deals.

Buy to let mortgage rates

Buy to let mortgage rates have been falling steadily over the last five years or so, and variable rate deals have also followed a similar pattern.

Mortgage for buy to let companies

Due to cuts to mortgage interest tax relief and wear and tear allowance, some landlords have started company structures for their buy to let portfolios.

This model won’t work for everyone, however, as the interest rates tend to be much higher than those for individual borrowers.

Affordability rules for landlords

As part of the strict affordability tests that lenders put landlords through when it comes to taking out buy to let mortgages, lenders often use interest cover ratios on buy to let mortgages to calculate how much profit a landlord is likely to make.

The interest cover ratio (ICR) that is used by lenders refers to the ratio at which the rental income of a property must cover the landlord’s mortgage payments, usually at a representative interest rate of around 5.5%. 

Lenders are typically required to test at around 125%, but some lenders require a projected rental income of around 145% of the landlord’s mortgage payments.

How to get the best buy to let mortgage deal

To find the best deal on a buy to let mortgage, you will have to spend time researching different providers and comparing quotes from different lenders to see what kind of deal you can get.

This process can often be quite time-consuming, but you can use comparison tools like the ones that MoneySuperMarket offers to find the best buy to let mortgage deal and lender.

To get the best deal on a buy to let mortgage, it’s also worth noting that the bigger deposit you have available, the more likely you are to obtain a better deal. Having a larger deposit will show the lender that you pose less of a risk as you’re willing to offer up a large percentage of the value of the property that you intend on buying.

Once you’ve found a good deal, you’ll then have to make your application with a buy to let mortgage broker and at this stage, you must ensure that you have all the necessary and relevant documents prepared to make your application.

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