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Buy-to-let—what it means, how it works and how to get a buy-to-let mortgage

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What is buy-to-let? Why get a buy-to-let mortgage?

A house you buy with the intention of renting it out to tenants is known as a buy-to-let property.

A buy-to-let mortgage (or BTL mortgage) is a particular residential mortgage provided for this purpose. It’s different to the mortgages offered to people who are buying a house to live in themselves. How these mortgages work is explained below.

How do buy-to-let mortgages work?

Most buy-to-let mortgages are interest-only mortgages. Each month, you pay only the interest on the amount you borrowed and none of the loan itself.

While this keeps your monthly payments fairly low, it does mean you need to be able to pay off the full amount at the end of the term (or remortgage).

The idea is to cover your mortgage payments using rental income from your tenants. However, mortgage providers consider this type of lending higher-risk as issues may result if:

  • you have problems collecting rent
  • your tenants move out and it takes time to find new ones
  • your tenants simply can’t pay

This is why buy-to-let mortgages generally require a bigger upfront deposit and carry a higher rate of interest. The arrangement fees for these mortgages also tend to be more expensive.

What types of buy-to-let mortgage are there?

Typically, there are three main types:

Type of mortgage

Mortgage rates

Tracker mortgage

The interest rate is set in line with the Bank of England’s base rate. If this base rate changes (up or down), your mortgage repayments may also change.

Discounted variable rate mortgage

The interest rate is the lender’s standard variable rate (SVR)—the rate it charges homebuyers as standard, set in line with the Bank of England’s base rate—with a discount applied.

For example, if the SVR is 5%, the discounted variable rate might be 3%. If the SVR rises in line with the base rate—say to 6%—the interest rate on your mortgage will rise, but with the same discount still in place (i.e. to 4%).

These discounted rates usually apply for two or three years, after which time you switch to the SVR. Remember, not all lenders have the same SVR so it’s worth shopping around.

Fixed rate mortgage

The interest rate stays the same for a set number of years (typically two to five), after which time you switch to the SVR. If this is higher, you can look for better mortgage deals elsewhere.

Who can get one?

All mortgage lenders have criteria they apply to check that you’re eligible to borrow from them.

Generally, you’ll be accepted for a buy-to-let mortgage if you:

  • intend to rent out the property and not live there yourself
  • are within the lender’s age limits:
    • at least 25 to begin with
    • no older than 70–75 when the mortgage is due to end—for example, a 25-year mortgage taken out at age 50 would finish when you were 70
  • earn at least £25,000 a year
  • already own a property in the UK, and aren’t a first-time buyer
  • can afford the risks that come with investing in property, and have at least 25% of the purchase price as a deposit
  • have a good credit record

There are also conditions around what kind of property you’re buying. Usually, the property:

  • must be in the UK
  • must be in good repair and condition
  • must not be divided into separate units, or a house in multiple occupation (HMO) (such as a student house)
  • must be valued at £40,000 or more
  • must not be part of a portfolio of 10 or more properties

How much can I borrow?

When deciding whether to lend you money, mortgage lenders use what’s known as a loan-to-value (LTV) ratio. The LTV is the maximum amount they will let you borrow, based on a percentage of the property’s value and how much you have as a deposit.

Example

The house you want to buy costs £250,000.

You have a deposit of £65,000 or 26% (buy-to-let mortgages require a deposit of 25% or more).

So you need to borrow the remaining £185,000.

This makes the LTV ratio 74%.

The more you can put down as a deposit, the lower your LTV ratio and the likelier you are to be accepted for the mortgage. It also means you’ll pay less each month in mortgage repayments. However, remember that you’ll still have a large total amount payable at the end of the mortgage term.

What deposit do I need?

Because lenders see buy-to-let mortgages as higher-risk, they tend to specify a deposit of at least 25% of the purchase price.

Putting down more deposit money gives you a lower loan-to-value ratio, the calculation lenders use to assess whether there’s a chance you might default on your mortgage repayments.

In comparison, a normal residential mortgage might only require a deposit of 10%.

How many buy-to-let mortgages can I have?

This varies from lender to lender. Some may limit you to a small number of mortgages while others won’t impose any restrictions at all providing you can demonstrate you have the funds to take on that level of financial risk.

Being refused by one lender doesn’t necessarily mean the rest will follow, so always shop around.

Can I live in a buy-to-let property?

The fundamental condition of a buy-to-let mortgage is that you—as the landlord—rent the property to tenants. Living in the home yourself means you’re breaking the terms of your mortgage, which is seen as fraud.

If you’re in a position where you want to live in a property you bought with a buy-to-let mortgage, you’d need to arrange refinancing. Discuss this with your buy-to-let lender or mortgage broker.

Can I remortgage a buy-to-let property?

Yes, and indeed a lot of property investors remortgage so they can use the equity as a deposit to purchase more buy-to-let homes.

However, recent changes to the tax system have made remortgaging a buy-to-let property less profitable and more restrictive so you should seek proper advice before going ahead with any refinancing.

Read more about remortgaging in our guide here.

Are buy-to-let mortgages regulated?

Yes, although in a somewhat different way to how a residential mortgage is regulated.

Residential mortgages are tightly controlled, under conditions set by the Financial Conduct Authority (FCA). Up until March 2016, buy-to-let mortgages weren’t afforded this same protection as they were considered business transactions.

Since then, the FCA has widened its scope to cover regulations for buy-to-let loans. However, the UK government has excluded buy-to-let mortgages from these rules and instead made them part of other legislation. This allows mortgage lenders to avoid certain obligations when providing buy-to-let loans.

To read more on buy-to-let mortgages at the Financial Conduct Authority’s website, click here.

How much stamp duty would I pay on a buy-to-let property?

If you buy a property separate to the one you live in as your main residence—whether a buy-to-let property or a holiday home—you’ll pay the usual stamp duty plus an extra 3%.

The table below sets out how much stamp duty you’ll pay, based on the price of the property.

Value of the property

What you’ll pay in stamp duty

Up to £125,000

3%

The next £125,000 (£125,001–£250,000)

5%

The next £675,000 (£250,001–£925,000)

8%

The next £575,000 (£925,001–£1.5 million)

13%

The remaining amount (£1.5 million +)

15%

Read more in our guide to stamp duty.

Can I rent my buy-to-let property to a family member?

Possibly. Many lenders specifically restrict the rental of property to family members. If you intend to do this, we advise letting your lender know, to make sure it’s acceptable. In any case, you would need to treat the family member in the same way as any other tenant.

This means:

  • charging enough in rent to cover your monthly mortgage payments—which might prevent you from asking less in rent or letting them live in the house for free
  • having a proper tenancy agreement
  • knowing your legal responsibilities as landlord, and complying with the relevant laws and regulations

Renting a property to a family member is known as a regulated buy-to-let, and falls under the regulations set by the Financial Conduct Authority. Most mortgage lenders don’t offer mortgages on these types of buy-to-lets, although some are beginning to.

Is it worth investing in a buy-to-let property?

It can be—it just means doing plenty of research when determining whether you can afford it.

The 3% surcharge on stamp duty, the capping of mortgage interest tax relief and rising property prices have certainly made the prospect less attractive to some investors.

Ultimately, it depends on what you want to gain from your buy-to-let property. If you’re looking to see growth in your investment, you might be disappointed, as the laws and regulations around taxes and property landlords are expected to tighten up.

If rental yield—the return you expect to make through renting the property—is your main consideration—you must think carefully about where the home is located. Property prices vary widely throughout the UK and are vital to any calculations around rental yield and your rental income.

Can I release equity on a buy-to-let property?

Yes. Indeed, it’s how many property investors raise money to add more homes to their portfolios.

How much equity you’re able to release will depend on your age and the value of the property. Your mortgage lender will have the home valued—at your expense—and use this valuation to set the amount of equity.

Before you decide to go ahead with this, it’s best to discuss it with a buy-to-let broker. These specialist mortgage advisers will be able to tell you whether equity release is the right option for you or whether selling the property might be more worthwhile.

What is tax relief on buy-to-let?

Before April 2017—when the government’s system for taxing rental income—buy-to-let landlords paid tax only on the profit they made from rent, and not the full income.

This enabled landlords to deduct all their mortgage expenses from the money they received as rent, so reducing their tax bills. This is known as tax relief.

That change to the system means landlords now get a tax credit allowing them to claim a certain percentage of the full tax relief they were getting before. The change is being enforced in phases between 2017 and 2020, with the tax credit falling significantly in the process.

Tax year

Percentage of mortgage tax relief

2017–2018

75%

2018–2019

50%

2019–2020

25%

What fees do solicitors charge people who purchase buy-to-let properties?

At Graysons Solicitors, we charge according to our usual scale for buying a residential property. However, remember that there’s a 3% surcharge on stamp duty land tax when purchasing a buy-to-let property.

For a free and instant quote of our fees, use our conveyancing tool.

Are these solicitors’ fees tax-deductible?

Yes, according to the rules for tax relief that changed in April 2017 (see above).

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Buying and owning houses, property and land

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