Your mortgage repayments will be the biggest ongoing cost of your BTL, so whether you’re investing in your first property or adding to an existing portfolio, securing the right deal is essential to maximise your potential profit.
Whilst there are similarities between BTL and standard residential mortgages, there are some key differences to be aware of. This guide explains what a BTL mortgage is, when you’ll require one, typical eligibility requirements, and how to get the most out of your investment.
What is a buy-to-let mortgage?
A buy-to-let mortgage is a loan specifically designed for properties that are purchased with the intention of renting them out to tenants. Without a BTL mortgage, you won’t usually be permitted to let out a property for profit unless you own it outright.Depending on your preferences, BTL mortgages, sometimes referred to as ‘landlord mortgages’ can be used to buy residential rental property, student accommodation, holiday homes, or anything in between.
You may need to consider a buy to let mortgage if you are:
- Buying a house to rent out for additional income.
- Purchasing a holiday home which you intend to let out.
- An accidental landlord, if you’ve decided to let out a property you’re unable to sell, or have inherited.
What’s the difference between residential and buy-to-let mortgages?
Unlike residential mortgages, whereby the mortgage holder will likely be a permanent resident of the property, the owner is not usually permitted to live in a BTL; these types of mortgages are specifically designed for third party letting.The majority of residential mortgages are repayment plans, which means you repay a portion of the loan and interest every month. Most UK BTL mortgages on the other hand are interest-only, so you’ll only be required to repay the mortgage interest each month. It also means you’ll need a plan for how you’ll settle the outstanding debt when the term ends.
Eligibility requirements are slightly different for BTL mortgages, with the most significant relating to the way affordability is calculated. For residential mortgages, this is based on personal income and expenses.
For BTLs, although lenders may factor personal circumstances into their calculations, the determining factor is based on the strength of the investment and projected rental income. As such, the majority of BTLs are not regulated by the Financial Conduct Authority (FCA).
How much can you borrow for a buy-to-let mortgage?
How much you can borrow for a BTL mortgage usually boils down to the amount of rental income that you’re expecting to receive from the tenants of the property. Usually, the income needs to be at least 25-30% higher than what you’re paying for the mortgage.Although there are lenders offering BTL mortgages with no borrowing limit, eligibility assessments are still stringent, and applicants are advised to acquire a rental income forecast from an ARLA-regulated letting agent.
Rental returns and yield requirements for BTL properties
Most mortgage providers have minimum projected rental return requirements. Your ‘rental ROI’ is calculated by subtracting the mortgage and running costs from the amount of projected rent, divided by the total amount of cash you invested to purchase the property.Most lenders like to see a rental return of 125% or more, and they will stress-test this using your projected rental income and qualifying mortgage rate.
Rental yield refers to the amount of money you make on a BTL property by measuring the difference between your overall costs and the income you receive from letting it out. This is calculated by dividing the purchase price by the amount of yearly rent generated. A rental yield of 8% or more is generally viewed as a ‘healthy investment’.
As an example, if the purchase price of your property was £200,000 and your tenants pay £350 a week rent, the annual rent £18,200, making your property yield just under 11%.
Are there minimum income requirements for a BTL mortgage?
While the majority of buy-to-let mortgage providers base affordability on projected rental income, some will only agree to lend if you bring in a certain amount from other sources - regardless of whether you intend your investment to be self-funding.If you don’t receive any additional income, seek advice from a broker. They are familiar with the buy-to-let mortgage market, and can point you in the direction of lenders most likely to consider applications based on rental income alone.
How much deposit is needed for a buy-to-let mortgage?
Deposit requirements for buy-to-let mortgages are far higher than residential ones, as they are considered a riskier investment.The standard loan-to-value (LTV) for BTL is around 75-80%, which translates to 20-25% deposit - although some providers may be more generous for the right applicant. Likewise, if you pose a greater risk in other areas (e.g. bad credit or low rental yield), a lender may have higher deposit requirements to balance out the risk.
If you already own property but are struggling to save a sufficient deposit for a BTL mortgage, you might consider releasing some of the capital and putting it towards your investment. This can also be a good way of boosting your borrowing prospects.
Generally speaking, the more deposit you’re able to put down, the greater the lender pool and the more favourable the interest rates you’re likely to be offered.
Can adverse credit applicants get a BTL mortgage?
While mortgage providers can be reluctant to lend to people with bad credit history, plenty of lenders are happy to take the bigger picture into account before coming to a decision. There are even specialist bad credit mortgage providers out there.The type of bad credit, how long ago it occurred and the circumstances surrounding it will impact which lenders are available, the type of products you qualify for, and under what terms. Depending on your situation, you may be asked to pay a higher deposit to offset the added risk, or you may be offered less competitive rates than someone with clean credit.
There are a number of variables at play, so if you have poor credit you’re best off discussing your circumstances with a broker, who can explain your options and point you in the direction of lenders most likely to consider your application.
Can you get a buy-to-let mortgage as a first-time buyer?
Most mortgage providers won’t lend to BTL borrowers unless they already own their own home, and some will stipulate that you have to have been a homeowner for over a certain amount of time.Generally speaking, BTL mortgage providers favour customers with landlord experience, as evidence of a strong track record of managing rental properties will provide additional support to your application.
There are however some providers who are willing to consider BTL applicants that are first-time landlords or even first-time buyers, although you may be limited in your choice of lenders, and there could be caveats attached.
Will my age impact my BTL mortgage eligibility?
As a general rule, most BTL lenders will only consider applicants over the age of 21 for a BTL mortgage. This is because lenders like to see proof of your ability to manage money (stable income, solid affordability and clean credit) over a minimum three year period.The number of lenders you have access to may also be limited if you’re over the age of 75; many mortgage providers have maximum age caps for how old you are when you take the mortgage out, and your age when the term finishes.
If you’re concerned that your age will negatively impact your BTL application, get in touch to discuss your options with a broker; they will be able to advise you on next steps, and point you in the direction of specialist lenders with more flexible criteria.
Is a BTL investment right for me?
If you’ve got the means and opportunity, becoming a landlord can be a tempting investment prospect. But it’s important to understand the market and what you’re letting yourself in for - why not ask a mortgage broker to explain the process in more detail?Advantages of buy-to-let mortgages
As house prices continue to soar, property remains one of the biggest investment opportunities of all time. For prospective BTL landlords, it can be a more than viable means of increasing returns.Strong rental market
Arguably, there’s never been a better time to become a landlord. Despite the government’s pledge to “turn generation rent into generation buy”, low rental supply has pushed demand and rental increases to record highs.
Long-term investment opportunities
As well as generating short-term gains from your rental income, property in itself can be a lucrative long-term investment. House prices continue to increase in value, so when the time comes to sell up, you could be looking at a generous return.
Tax benefits
Landlords receive a 20% tax credit on interest payments, meaning you can reclaim some of the costs associated with running your buy-to-let property when you submit your annual tax return.
Disadvantages of buy-to-let mortgages
Although there are some tempting opportunities associated with becoming a buy-to-let landlord, it’s not all plain sailing; there are a number of tax implications to consider, not to mention the prospect of dealing with tricky tenants.Property risks
The last thing you want as a landlord is an empty property that no tenants are interested in living in. Try to put yourself in your tenants’ shoes and only invest in property in sought-after areas that you personally would be happy to live in.
Tenant-related risks
Letting out your BTL to undesirable tenants is always a risk for landlords. Having tenants that cause damage to your property or refuse to pay their rent can land you in financial difficulty if you’re relying on these funds to repay the mortgage. Taking out comprehensive insurance can help safeguard against these risks.
Stamp Duty
For BTLs, Stamp Duty Land Tax (SDLT) is an additional 3% on top of the usual SDLT rate bands for properties above £40,000. This can add thousands to your up-front costs, so it’s vital you remember to budget for this.
Long-term market uncertainty
Although demand for rentals is currently rife, any investment is a gamble. There’s no knowing what the future holds, nor how the impact of economic issues such as Brexit or the coronavirus pandemic may impact the property market.
Tax relief changes
One of the most significant downsides are the changes to BTL tax relief. Historically, landlords could offset mortgage interest payments against rental income. This has now been replaced with a 20% tax credit.
This new system means higher or additional-rate taxpayers can no longer claim the tax back on their mortgage repayments, and could also push some landlords into higher rate tax brackets, depending on the income you receive from other sources.
Capital gains tax (CGT)
If you sell your buy-to-let property and make a profit, you will be liable to pay Capital Gains Tax (CGT). The current UK GCT tax allowance is £12,300 per person, meaning you pay no capital gains tax on the first £12,300 of any gain you make.
When you exceed this threshold, landlords that fall into the basic rate income tax band are required to pay 18% CGT on BTL properties, which increases to 28% for higher- or additional-rate taxpayers.
Why speak to a specialist buy-to-let mortgage broker?
Becoming a buy-to-let landlord is a big commitment, and you should give it plenty of thought before jumping into a decision.If you have any questions or want to discuss the viability of your prospective BTL investment, a good starting point is to have a chat with an impartial mortgage broker. Our specialists will take the time to understand your individual requirements and investment goals, and recommend the next steps to take.
If you decide to go ahead, they can point you in the direction of suitable lenders for your circumstances - whether that be a bad credit provider or first-time landlord specialist - so you’re in with the best chance of securing a suitable BTL mortgage with favourable rates.
Give us a call on 02380 980304 or request a callback, and a member of the team will be in touch to help get your plans in motion.
