How do buy-to-let mortgages work?

A question we often get asked here at My Mortgage Pro is: how do buy-to-let mortgages work? Buy-to-let mortgages are a special type of home loan designed for people who have invested in property with the sole intention of renting it out, rather than living in it themselves. Because buy-to-let purchases are viewed as business transactions, rather than personal ones, you can’t get a standard residential mortgage for a buy-to-let investment.

While buy-to-let mortgages work in a similar way to normal residential mortgages, there are some key differences you need to bear in mind, which we’ll get on to later in this guide. There are also some differences in the application process that you’ll need to be aware of, especially if you are a first-time landlord or don’t have much experience of the buy-to-let market.

What is a buy-to-let mortgage?

A buy-to-let mortgage is a type of mortgage specifically used to purchase a property – such as a house, flat or apartment – that has been bought for the sole purpose of renting out to others. Where buy-to-let mortgages differ from standard residential mortgages is that they are usually interest-only, meaning you pay the interest each month, but not the capital amount. At the end of the mortgage term, you repay the original loan in full.

That said, there are some buy-to-let mortgages available on a repayment basis, but you might need some help to find the right lenders and deals. Most lenders tend to view buy-to-let mortgages as more of a risk than residential mortgages, simply because the income a buy-to-let property might be able to generate can never be guaranteed.

Landlords often face problems in collecting rent, for example, and unless they have a long-term tenant in place, the property may be unoccupied for varying periods of time. This is one of the pitfalls of owning a buy-to-let property that you should bear in mind… will you still be able to afford the repayments even if you are not getting any rent from it?

And because of this increased risk, the fees lenders charge on buy-to-let mortgages tend to be higher and so do the interest rates.  The minimum deposit for a buy-to-let mortgage, meanwhile, can be anywhere between 20% and 40% of the property’s value.

How do buy-to-let mortgages work?

A buy-to-let mortgage enables you to purchase a property and rent it out to somebody else. It means you can buy the property as an investment without needing to save up enough money to buy it outright, and then recoup your costs by charging your tenants rent to cover the mortgage.

The rental income you receive should be enough to, at the very least, cover the cost of your monthly buy-to-let mortgage repayments, along with any other costs such as repairs or legal/letting fees.

In an ideal world, you should also be able to achieve a small profit from the rent you charge. However, if your property’s value increases over time, you may be able to realise a bigger return on your investment if you can sell it for more than you paid for it at the end of your mortgage term. In that case, you would simply pay off the mortgage in full, from the proceeds of the property sale, and keep anything left over as profit.

In reality, though, it’s not quite that simple, so you should do your homework properly before you decide to invest.

Can I get a buy-to-let mortgage?

Whether you are a novice landlord or a seasoned property professional, there will be several buy-to-let mortgage options available to you. As with most mortgages, having a large deposit will stand you in good stead. It will demonstrate to the lender that you are of good financial standing, as well as helping bring down the cost of your monthly repayments.

However, there are a few other factors that lenders will consider.
The older you are, the harder it tends to be to get a buy-to-let mortgage because most loans have a term of 25 years and many lenders set an upper limit on how old you might be at the end of your mortgage term. If the upper age limit is 70, for example, you will struggle to get a loan if you are over 45.

Many lenders also require that you have your own home, meet a minimum salary requirement (usually between £20,000 and £25,000), have a good credit record and can meet any other affordability tests.

Contact us for more information about Buy-to-Let Mortgages

My Mortgage Pro is a professional mortgage information service. While we don’t give advice, we aim to provide you with simple, jargon-free, no-nonsense information about buy-to-let mortgages to help you make the right choice. We can also connect you with a specially selected panel of leading mortgage advisers, who are authorised and regulated by the Financial Conduct Authority, who will provide advice tailored to your specific circumstances and help you find the right buy-to-let mortgage, fast.

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