What is a buy-to-let mortgage?
A buy-to-let mortgage helps you buy a property to rent out to paying tenants. It's different to a residential mortgage in several ways. One is that the amount you can borrow is partly based on how much rent you could earn from the property, and not so much the size of your income.
Buy-to-let mortgages also tend to be interest-only, meaning you only pay the monthly interest and not the loan itself until your mortgage ends. Because of this higher risk to lenders, they usually require a higher deposit and add on more interest and fees than usual.
Rental properties aren't covered by standard mortgages, so you'll need to arrange a buy-to-let mortgage unless you're buying outright.
How much does a buy-to-let mortgage cost?
Buy-to-let mortgages can be an expensive business. Here's a breakdown of the main factors to consider when working out the cost:
Large deposit
Most lenders will require a deposit between 20-40% of the property value. The more deposit you can offer, the smaller the loan you'll need and the less interest you'll pay every month, which could lead to more profit from your property portfolio.
Get your quoteMortgage term
The length (or term) of your mortgage also affects how much interest you'll pay each month. If you can keep the loan term relatively short, you'll pay less interest overall.
Get your quoteMortgage type
Interest-only mortgages may seem like the cheaper option, but you'll be left with the entire loan to pay at the end. Repayment mortgages are more costly per month, but they slowly reduce the loan with every payment.
Get your quoteInterest rates
Your monthly interest will be based on factors like your credit score, the loan amount, and your income and affordability. Your lender's rates will be generally higher for this type of mortgage.
Get your quoteFees and charges
As a landlord in the UK, you'll be subject to a range of extra fees on your buy-to-let property. These include stamp duty, income tax, conveyancing fees, landlord insurance and legal fees.
Get your quoteAdditional costs
You have various duties and responsibilities as a landlord which add to the cost of your buy-to-let. These include regular maintenance, unexpected repairs, surveys and safety inspections.
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Interest only vs. repayment
Although interest-only mortgages are the most common type of buy-to-let, you generally have two options available to you:
Interest only mortgages
An interest only mortgage means you pay only the monthly interest on your mortgage. You don't pay any of the loan itself until the end of the agreement. This keeps your monthly payments low, and means you can use the spare funds to improve the property and increase its value. Between increased equity and rental income, you can aim to be in a strong financial position once the mortgage is due.
Repayment mortgages
A repayment mortgage is the standard residential mortgage. Here you'll pay both the interest and some of the loan every month. This means that your monthly payments will be higher, but you'll slowly reduce the loan amount until the end of the mortgage. At that point, you can either sell the property or continue renting it. Either way, you'll benefit from all of the sale or rental income now that your mortgage is paid.
Fixed rate and variable rate mortgages
Fixed rate mortgage
- Higher Rates: Fixed interest rates are often higher than variable rates, especially over a longer-term mortgage.
- Rate Certainty: Your mortgage repayments stay the same for a given period, protecting you against rises in the base rate.
- Simple Planning: You might find a fixed rate simpler when it comes to planning and budgeting.
- Low Flexibility: You have less flexibility with a fixed rate mortgage, and won't benefit from drops in interest rates without changing your plan. Switching or paying early can incur fees.
Variable rate mortgage
- Lower Rates: Variable rates are often lower than those offered on a fixed rate basis.
- Unexpected Increases: Your monthly interest may go up if the lender's standard variable rate (SVR) or the Bank of England's base rate increases.
- Unexpected Decreases: There's also the chance your interest rate could go down if your lender or the Bank of England lower theirs.
- Range of Options: You'll find various rates available, including discounted variable rates for a given period, standard variable rates and tracker rates, which follow the Bank of England's base rate.
Am I eligible for a buy-to-let mortgage?
First things first, you'll need to be over 21 and have a good credit history to be considered for a buy-to-let mortgage. Lenders want to see that you're a reliable borrower and property owner, so you'll need to own your own home outright or have a mortgage that you're managing well.
The key to unlocking buy-to-let mortgages is that your projected rental income will cover the monthly mortgage payments with at least 25% on top. In addition, lenders will usually expect a deposit of 20% or more.
Lenders will also expect you to have a separate income as a safeguard against difficult rental periods. As always, the higher your income the better, but an annual salary of £25,000 is generally the minimum.
Taxes, Fees and Charges on a Buy-to-Let Mortgage
As well as the cost of repairs and a fluctuating property market, you'll need to factor in the following costs when working out your buy-to-let profit.
1. Income Tax
Any income you make through your property could be subject to income tax. This is after your untaxed property allowance of £1,000, your standard untaxed personal allowance (from £12,570), and a landlords' 20% tax credit on mortgage interest.
Certain other fees - such as council tax, insurance and agency fees - count as "allowable expenses" and can further reduce your tax bill.
2. Stamp Duty
If you own your home or other residence in the UK, buying a buy-to-let property will trigger a higher rate of Stamp Duty Land Tax (SDLT) for the new property. This is usually an additional 3% on the standard SDLT rate.
The equivalent in Scotland is Land and Buildings Transaction Tax (LBTT) and in Wales it's the Land Transaction Tax (LTT).
3. Capital Gains Tax
If you decide to sell the property you're renting out, you’ll normally have to pay Capital Gains Tax on the amount you make. You have a tax-free allowance of £3000, but any amount above this will be subject to tax.
4. Landlord Insurance
Whether it's a building emergency or trouble finding new tenants, not all rentals are plain sailing. If something goes wrong, landlord insurance can provide some flexibility and peace of mind.
Also known as buy-to-let insurance, cover can include buildings insurance, rental protection insurance, unoccupied property cover and tenant default insurance.
5. Letting Agency Fees
Using a letting agent can take some of the work and hassle out of renting property. Agents offer a range of services, from finding and vetting tenants through to handling maintenance issues, and their fees vary accordingly.
6. Surveys and Legal Fees
Before taking on a buy-to-let property, you'll need a solicitor to handle the official paperwork, known as conveyancing.
Your estate agent may suggest their preferred solicitor and a surveyor to check for structural issues and upcoming repairs. You'll also need to arrange an annual gas safety check.
Applying for a Buy-to-Let Mortgage
Our expert says:
"A buy-to-let mortgage could signal the beginning of your second career as a landlord and unlock the renting experience for countless tenants. Be sure to consider all the costs of running a good rental property, weigh them against mortgage interest rates and deal structures, and prepare to become a great landlord to your tenants. Happy renting!"
Frequently Asked Questions
Can I rent out a property with a residential mortgage?
Unfortunately not. Residential mortgages usually come with strict terms and conditions that prevent you from renting out the property. If you rent it anyway, you'll be committing "mortgage fraud" and the lender may demand immediate repayment of the mortgage. You'll also be at risk of repossession.If you already have a residential mortgage and want to rent out your home for a short period, then you can ask your lender for "consent to let". There's usually a fee for this and sometimes an increase in your monthly interest. Consent to let is also an option if you're looking to rent out your current home when you move.
Can I switch my mortgage to a buy-to-let mortgage?
Yes, usually. Many budding landlords change the mortgage on their existing home to a buy-to-let mortgage. Check your agreement and speak to your mortgage provider about your options.
Can I take out a buy-to-let mortgage for a holiday home?
Buy-to-let mortgages are meant for landlords to rent to paying tenants, usually over the medium to long-term. If you're looking to rent your property as a holiday home, whether through Airbnb or similar, you should look into a holiday let mortgage.
Holiday let mortgages are designed for multiple guests staying for short periods. They have similar criteria as buy-to-let, such as a high deposit and good projected rental income, but they require holiday home insurance in addition to other fees.
Is it expensive to rent out property in the UK?
As any landlord will tell you, a buy-to-let mortgage is more than just handing over a spare set of keys and collecting rent every month. In addition to the taxes and fees outlined in this article, you'll also need to allow for regular maintenance and refurbishments to keep your property in good order.
From boiler leaks to broken appliances, replacement locks and pest control -- it pays to expect the unexpected when budgeting for buy-to-let.
What happens at the end of my buy-to-let mortgage?
If your mortgage is interest-only, your lender will ask for the entire loan to be repaid when it ends. At this point, you'll have the option to sell your property to pay off the mortgage, or use a lump sump you've accrued through rental income and other savings.
If you're on a repayment mortgage, your interest rate will automatically switch to your lender's standard variable rate (SVR). This can be expensive, so it pays to remortgage if you're nearing the end of the initial period. Remortgaging can give you access to better deals and spare funds to further develop the property.
What if I can't sell my property to pay the mortgage?
If property prices have dropped and yours no longer covers the mortgage amount, you should talk to your mortgage provider to discuss your options. The same goes if you'd like to continue renting the property but don't have the lump sum necessary to pay off the loan.
Don't wait until your mortgage is due before taking action. The sooner you contact them, the more likely they are to suggest an alternative deal or repayment option that suits you both.
Why aren't buy-to-let mortgages regulated?
The majority of buy-to-let mortgages aren't regulated by the Financial Conduct Authority (FCA) and don't come with the same restrictions and protections as a residential mortgage. That's because the FCA is set up to regulate consumer transactions, and buy-to-let is considered a business transaction.
The size and standing of your mortgage provider has no impact on this. Barclays and Santander are regulated under the FCA but their buy-to-let mortgages typically aren't.
One exception is a consumer buy-to-let mortgage for non-professional landlords, such as those renting to a family member. As a consumer product, these are regulated by the FCA.
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