Buy To Let Mortgages - Explained

If you are going to buy a property to let you’ll need a buy-to-let mortgage. While you would once have had to pay a significantly higher interest rate for a buy-to-let product than one for a residential purchase, the increasing number of people buying to let and the resulting competition among lenders has meant the gap has narrowed.

For example, for a residential variable-rate mortgage with no extended tie-in you can expect to pay an initial rate of between 4% and 4.5% for one of the current best buys, while for a buy-to-let product with no extended tie-in you would pay between 5% and 5.5%. This slightly higher rate makes up for the fact that it is riskier for a lender to lend on a property that is going to be let.

However, as with all mortgages, you can get lower rates if you are willing to take out a product with an extended tie-in. The current best buys in this category have interest rates starting at around 3.8%. If you do decide to go for one of these mortgages, make sure you will be able to cover the payments when the rate goes up at the end of the deal period and that it will not significantly affect your profits.

Buy-to-let mortgages work differently to residential ones. For a start, rather than looking at your income to determine how much they will lend you, lenders will want to be satisfied that the rental income you will be able to get from the property will cover the mortgage interest payments for the amount you want to borrow by at least 120% to 130% – buy-to-let mortgages are usually taken out on an interest-only basis.

Fees also tend to be higher. On average, they range from around £700 to 1.5% of the loan amount. Make sure you take this into account when budgeting for your investment. Other fees you may have to pay the lender include a mortgage valuation fee, although if you are remortgaging this may be paid for you.

There are often restrictions on the number of properties you can have when taking out a particular mortgage and the maximum total advance allowed for each property. There may be a maximum of five or 10 properties allowed, while the maximum advance could range from £1.5m to £10m. There may also be restrictions if the property needs extensive work and the lender may insist that this is carried out before it grants you a full mortgage.

Another difference is that you generally need a higher deposit for a buy-to-let product as lenders want to know that you have made a substantial financial commitment because of the increased risk involved. You should expect to pay at least 15%, although in some cases it could be as much as 50%. As with most mortgage types, the bigger the deposit you can pay the better the rates that will be available to you.

Buy-to-let mortgages can be fixed, discounted or tracker products and there are also now flexible and self-certification ones available. Which you should choose depends on your current and future needs, attitude to risk, amount of deposit you have and what you think might happen to interest rates in the future.

The choice of lenders includes specialist ones focusing on niche products such as adverse credit, self-certification or buy-to-let ones, lenders that concentrate solely on buy-to-let and can therefore offer a more tailored service, and mainstream lenders, many of which now offer buy-to-let mortgages but may not be able to offer the range of products and services specialist lenders can.

As the capital value of your property increases it may be possible to remortgage to release equity and fund the purchase of more properties, growing your portfolio. However, as with any mortgage you should make sure you will be able to cover the increased interest payments and that you are not overstretching yourself.