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Buy-to-let mortgages: Everything you need to know

7 November 2023

Author: Adam Camm

If you’re considering entering the world of property investment in the UK, a crucial aspect to understand is the Buy to Let (BTL) mortgage. At Signature Funding Solutions, we’re committed not only to supporting our clients through their financial and property investment decisions but also to providing the public with a wealth of information.

Choosing a Buy-to-Let Mortgage

A buy-to-let mortgage is a mortgage that is specifically designed for those who want to buy property as an investment, and subsequently let it to a third party to reside in. As opposed to selecting a mortgage which is for a house they want to live in themselves.

Selecting the right BTL mortgage is paramount to your property investment success. These kinds of mortgages work differently from standard mortgages. If you are looking at renting out a property, you need to have an appropriate BTL mortgage contract in place with a suitable BTL lender, all of which have varying criteria.

How does a Buy to Let mortgage work?

A Buy-to-let mortgage allows a person or people to purchase a property with the intention of renting it out to a third party. They provide a way for investors and landlords to take their first or subsequent steps in the property-buying process.

The steps involved in a buy-to-let mortgage:

Put down a deposit. A deposit is required for a buy-to-let mortgage, just as it is with a standard mortgage. However, the deposit that is normally required is higher than a standard deposit, with a normal deposit for BTL being around 25% of the property’s value.
Interest-only payments. Many investors choose an interest-only mortgage for a buy-to-let mortgage, typically for cash flow reasons. This also allows for the surplus to be used to make house improvements or for further property investment. This means that you’ll pay the interest each month rather than paying off the value of the property and the full balance will be payable at the end of the mortgage term.
Rental income. Once a property is ready for renting out, investors will generate income by charging rent to tenants. This rent often covers the cost of the monthly mortgage repayments, and expenses, with the aim of making a profit from this rent.
Paying off the mortgage, if on an interest only basis. When the end of the mortgage term comes, the outstanding mortgage balance needs to be paid. This is normally done by paying the mortgage amount from savings, an ISA, or selling the property.

Choosing the Right Buy to let Mortgage Rate for you

Selecting the right BTL mortgage is vital to ensuring that the mortgage works for your financial situation and that you emerge from the investment making a profit.

Key factors to consider:

Interest rate options. Buy-to-let mortgages typically offer fixed, variable, or tracker interest rates. Fixed rates provide stability, while variable rates can change with the market. Tracker rates are linked to the Bank of England base rate and are therefore variable.
Interest only: As the name explains, this mortgage is where you only pay the interest during the term.
Capital and Repayment: This is where your mortgage payments would be made up of both interest and capital, in turn reducing the mortgage balance in line with the mortgage contract terms and conditions.
Loan to Value ratio: The LTV ratio represents the percentage of the property’s value you can borrow. Meaning if you are able to put down a larger deposit, then the rates are typically more favourable.
Affordability: Critically assessing your financial situation is important. Rather than being optimistic, it is vital that you are realistic, determining how much you can comfortably borrow and repay. Many lenders of BTL mortgages will assess your income, expenses and credit history, just as they do with a standard mortgage, although the principle assessment will be based on the specific debt service coverage ratio (DSCR), which is a nominated percentage, typically 125%, that the rent must cover the mortgage payments by, assuming the mortgage is at a specific rate of interest. All lenders have different criteria specifically for this.

What deposit do I need for a Buy-to-let mortgage?

The deposit required for a Buy-to-let mortgage in the UK usually ranges from 25-40% of the property’s value. However, there are some lenders that will consider a smaller deposit such as 20%.

Buy-to-Let mortgage products are typically higher than for standard mortgages. This is due to the fact that the risk associated with renting out a property is much higher. Plus the complexities involved if the property needs to be repossessed with tenants in place.

However, there are factors which affect the interest rates. These include your property investment experience, income, creditworthiness, loan to value and lender’s criteria.

How much do BTL mortgages cost?

The cost of a buy-to-let mortgage will differ from party to party. As it is dependent on the individual situation of the person, the people applying for the mortgage and the type of tenants that will reside in the property.

Deposit. The larger the deposit you’re able to put down the smaller the total mortgage amount you’ll borrow. In most BTL mortgage circumstances, lenders will ask for at least a 25% deposit.
Interest rates. Fixed rates give you the certainty of what you will need to pay each month, and tracker rates can fluctuate. Whether you have chosen an interest-only mortgage rate, which is most common, or a capital and repayment mortgage, interest rates will affect how much you’ll be paying monthly.
Loan term. The length of your BTL mortgage will determine how much your monthly payments total, should you opt for a capital and repayment mortgage, but also if you’ve opted for an interest-only mortgage, then the full balance of the mortgage will be due at the end of the loan term.
Fees. Lenders could charge arrangement fees and valuation fees and there could be early repayment charges included in your terms and conditions.

Different Interest Rates for Buy-to-Let Mortgages

Interest rates for BTL mortgages will fall under one of the following:

Fixed Rate. This is where the interest rate remains the same for a specific amount of time, normally this is between 2-5 years.
Variable Rate. This is where the interest rate can change. This is in line with the lender’s standard variable rate.
Tracker Rate. This is where the interest rates follow the Bank of England’s base rate, plus a set percentage on top.

However there are also other factors which can influence the interest rates on a Buy-to-let mortgage, and often these are specific to the party who is applying for the mortgage.

These include:

The loan-to-value ratio. As mentioned above, the bigger the proportion of the value of the property that you purchase via a loan, will often mean higher interstate rates.
Your own credit history and score. Each lender will assess you in terms of risk. They will determine, based on their calculations, your ability to make repayments on time, affordability and overall creditworthiness. If you have a poor credit history, this could result in higher interest rates.
Your individual property investment experience or lack thereof
The type of tenants that will reside in the property. These can vary significantly, from working professionals to charitable and vulnerable individuals.
The type of tenancy contract. The most common form of contract is an Assured Shorthold Tenancy.

Who can apply for a Buy-to-Let Mortgage?

Often eligibility for BTL mortgages can differ slightly based on the lender. Some have specific stipulations and will only offer a buy-to-let mortgage to people who meet their own criteria.

However, there are some generic criteria for being eligible to apply for a BTL mortgage:

Deposit. As mentioned previously, most lenders of a BTL mortgage will require at least a 25% deposit. This is often the first thing to determine yourself. If you are unable to meet this 25% deposit, you would either need to save more until you meet this, look at properties with a lower value or there could be a possibility of securing funds against an additional asset.
Age. Most lenders in the UK will require you to be 21 to apply for a buy-to-let mortgage.
Credit score. Most lenders will require you to have a credit score of a certain number, in order for them to consider offering you a mortgage.
Income. Just like with standard mortgages, some BTL mortgage lenders will look at how much money you earn. Usually, you need to be earning more than £25,000 to become a first-time landlord but this can vary dramatically from lender to lender.
UK Resident. Most lenders will require you to be a UK resident to offer you a BTL mortgage although it is not impossible to have a mortgage should you reside outside of the UK

The Benefits of a Buy-to-Let Mortgage

Income potential: Rental income can provide a steady stream of revenue.
Tax benefits. You could deduct some mortgage interest and other expenses from your rental income.
Property appreciation. Property values have typically increased historically.

The `Potential Cons of a Buy-to-Let Mortgage

Market risk. Property prices and rental demand fluctuate over time and therefore can change. Meaning there is a risk of properties being empty with no tenants.
Costs and fees. BTL mortgages come with various fees and expenses. Plus, the required deposit amount is typically higher than standard mortgages, with lenders normally asking for at least 25%.
Property management. Managing tenants and property maintenance can be time-consuming.
Tenants could fall in arrears with their rental payments
There may be void periods between a tenant exiting the property and you find a new incoming tenant.

Points to consider before applying for a BTL mortgage

Before applying for a Buy-to-let mortgage, there are a few headline points to consider to ensure that you have the best chance of being accepted by a lender for a BTL mortgage.

Research. It’s important to do your own research before applying for a mortgage. Understanding the area you want to purchase a property in, the demand in this area and the potential opportunities or issues with properties in this area e.g. development or investment.
Planning your finances. Before applying for a BTL mortgage, it’s vital to get your own finances arranged. That you have a financial plan in place to afford monthly payments, plus a surplus to cover unexpected expenses that could arise.
Available lenders. It’s important to shop around for the best and most appropriate mortgage rates. Consider the different lenders who will offer you a mortgage, but also considered the terms of each of these offers.
Exit strategies. Whilst no one applies for a BTL mortgage with the intention of exiting the agreement, it is always something that should be considered.

Buy- to-Let mortgages can be a lucrative investment strategy, but it’s essential to choose the right mortgage, understand the costs, and be aware of the responsibilities.

Signature Funding Solutions is here to provide expert guidance and help you navigate the world of property investment in the UK.

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