Your basic guide to a buy-to-let mortgage
Navigating your mortgage application can seem more daunting than the prospect of paying it. This no-nonsense, frustration-busting guide will answer all your basic residential and buy-to-let mortgage questions.
Am I eligible for a mortgage?
If you earn well, have low outgoings and a perfect credit history, you’ll be able to get a mortgage with pretty much any lender you choose.
A patchy credit history, high outgoings or self-employment can make it trickier, but not impossible. There are specialist lenders who will help applicants who find it hard to get a deal with the big banks (though the mortgage rates may be higher). Shop around and think about using a mortgage advisor (more on that further down).
What amount could I borrow based on my salary?
For a residential mortgage, you’ll probably be able to borrow anything up to 5 times your salary. But it may be much less, depending on:
- Your regular outgoings, especially credit commitments.
- Your credit history.
- How much deposit you have saved.
- Whether you have children or other dependents.
What kinds of mortgages are there?
This is the most common kind of mortgage. You’ll pay back both interest and the original loan every month, and when the mortgage term ends, you’ll own the property outright.
You’ll only pay the interest, and not the loan. This means you need to have a plan for paying off the loan at the end of the term, such as an endowment policy. Buy-to-let mortgages are usually interest-only, as the expectation is that you can sell the property to pay off the loan.
Fixed rate mortgage
Fixed-rate mortgages have a fixed rate of interest for a specified period of time, which can be anything from one year to 10. They mean you don’t get hit by rate rises, but you also don’t benefit from rate cuts.
Standard variable rate (SVR) mortgage
These follow the lender’s standard rate, which can be changed at any time. If you have a fixed-rate that ends, you’ll automatically move to an SVR mortgage unless you arrange another deal.
Discounted rate mortgage
Discounted mortgages set the rate at a certain percentage below the lender’s SVR, for a fixed period of time.
Tracker mortgages follow (or track) an external interest rate – usually the Bank of England base rate.
Capped rate mortgage
Capped rate mortgages follow the lender’s SVR, but with a guarantee that the rate won’t go above a certain level.
Cashback mortgages give you a lump sum (often around £1000) when you take out the mortgage. This can help towards moving or redecorating costs.
Flexible mortgages allow you to make changes in how much pay, including overpayments and payment holidays.
Offset mortgages allow you to offset your savings against your mortgage, reducing your interest.
There are a few other terms you might hear when looking for a mortgage. First-time mortgages are mortgages for first-time buyers. Second-time or remortgages are for those who already have a mortgage looking for a new deal. And buy-to-let mortgages are for prospective landlords.
Buy-to-let mortgages allow you to let your property to tenants. You can’t usually live in a property you own with a buy-to-let mortgage, and you can’t usually let a property with a residential mortgage.
55% of landlords have a buy-to-let mortgage, accounting for 61% of tenancies. Most of the rest will own their properties outright.
Different rules apply to buy-to-let mortgages, and they can be harder to get than residential mortgages. Some landlords take out buy-to-let mortgages through a limited company rather than as an individual, as this can mean tax savings. Talk to an accountant if you think this might be the case for you.
- A deposit of at least 25%, sometimes up to 40%. This is because buy-to-let is seen as riskier.
- To be a homeowner already, either outright or with a mortgage.
- To be earning a salary of at least £25,000.
- To have a good credit history and low levels of debt.
- To be no more than 70 or 75 when the mortgage term ends.
There may be exceptions to all these rules, but you’ll find it much harder to get a mortgage if you don’t meet these criteria.
Buy-to-let mortgages are usually interest-only (though there are some repayment loans available), so the monthly repayments are cheaper. But you’ll need more cash up front for a deposit than you would with a residential mortgage (which you could get with a deposit of as little as 5%). You’ll also usually pay higher arrangement fees and buy-to-let mortgage rates can be higher.
How much can you borrow?
A lender will want to verify that you can achieve enough rent to cover the mortgage, plus other expenses. They’ll usually want to see that your monthly rent will amount to 125 to 150% of the monthly mortgage repayment.
You will usually find it easier to borrow more if you have a bigger deposit and if you’re on a high salary, as both these things make lending less risky.
Can I move from residential to buy-to-let?
If you want to rent out the property you currently live in, you’ll need to speak to your lender. You’ll usually need to convert your mortgage and you’ll probably be assessed under the same criteria as a new customer would.
Can I let my property on a residential mortgage?
If you just want to let your home for a short period of time (for example, if you need to work away for a few months) your lender might give you permission without you needing to change your mortgage.
You won’t usually be allowed to let out a property long-term on a residential mortgage. This can include short-term holiday lettings.
It’s always wise to check before you let. If a lender finds that you’re in breach of your mortgage conditions, they could decide to make you pay back your entire loan instantly.
Do I need a mortgage advisor?
For most people, it’s a good idea to use an advisor, and they’ll help you find the best buy-to-let mortgage for you. Many estate agencies will have an in-house mortgage advisor who will help you get a mortgage and won’t charge a fee. But, because they don’t charge fees, they earn money from commission instead.
An independent advisor will usually charge a fee, but will look at the whole market for you, give you an unbiased recommendation and manage your application. They’ll also often be able to help if you’re finding it difficult to get a mortgage on your own, such as if you have a poor credit history or a smaller than average deposit.
Some mortgage advisors specialise in buy-to-let. It’s often worth using one, especially for your first buy-to-let investment or if you’re applying through a limited company.
Where can I get a buy-to-let mortgage?
You can get a buy-to-let mortgage from most high-street lenders. There are also some specialist buy-to-let lenders.
Getting a mortgage doesn’t have to be as daunting as you think. Do your research, get advice from the experts when you need it, and subscribe to our newsletter for more advice.
If you're looking for further inspiration where to invest, check out our post on London's buy-to-let hotspots.