If you decide to buy a property to rent out to someone else, rather than to live in yourself, you can’t just get a bog-standard, residential mortgage.
Instead, you need a Buy-To-Let mortgage (BTL).
But how exactly is a BTL mortgage different? How do they work? And where can you get one from?
In my article I’m going to answer all of these questions and more.
Let’s dive right in!
How Does A Buy-To-Let Mortgage Work?
In principle, a BTL mortgage is a lot like any other type of mortgage: you’ll borrow money from a lender to purchase a property and then make monthly repayments on that loan.
However, there are some important differences:
1. The fees and interest rates are likely to be higher.
2. There’s no 5% deposit schemes available when it comes to buying a property to rent out. The minimum deposit is normally going to be 25% of the property’s value.
3. A BTL mortgage is normally interest-only. Each month you’ll pay the interest, but you won’t pay anything off the capital. Once the mortgage term has ended you have to repay the original loan in full.
4. The majority of BTL mortgage lending isn’t regulated by the Financial Conduct Authority (FCA) – unless you are planning on letting the property to a close family member like your child or partner).
Can I Get A Buy-To-Let Mortgage And Live In The Property Myself?
In a nutshell no and certainly not without permission from your mortgage lender.
If you’re having trouble renting the property out, or change your mind and want to live in the house yourself, it’s not as simple as just moving on in! If you do, you’ll be breaking the terms of your mortgage and it could be considered fraud!
Basically if, for whatever reason, you now want to live in the property instead of renting it out, you’ll need an entirely different mortgage product.
It’s worth knowing that the same goes the other way around. Let’s say a change in your personal or financial circumstances has led to you becoming an ‘accidental landlord’ – needing to move into rented accommodation yourself, while letting out your own, mortgaged home.
It’s super important that you let your lender know if you plan on renting out a property that currently has an outstanding owner-occupier mortgage.
Because BTL properties are riskier for lenders, if you don’t tell your lender your plans you could, in theory, be invalidating your mortgage.
What happens in this situation will depend entirely on your lender. Some will grant you a consent to let on your current mortgage deal, while others will insist on you switching to a Buy-To-Let mortgage.
How Much Can I Borrow For A Buy-To-Let Mortgage?
Some lenders will take into consideration your personal income and won’t approve your for a BTL mortgage unless you’re earning over a certain amount from sources other than rent – £25,000 – £30,000 seems to be a common figure among lenders.
However, it’s important to remember that lenders are only going to lend you the money if the forecasted rental income is going to exceed the mortgage payments by 25% – 45% at a predetermined interest rate.
What Are The Advantages Of A Buy-To-Let Mortgage?
Obviously there are long-term investment gains to be had in buying a property to rent out.
Properties often increase in value over time, so besides the short-term gains in the form of rental income, you might make money in the future by selling up or remortgaging down the line.
Another advantage to buying a property to rent is that demand for high-quality rental accommodation is still high, so you shouldn’t, in theory, have a property sat empty for months on end with no rental income with which to pay the mortgage.
Also, there are tax benefits associated with Buy-To-Let properties. When you submit your tax return to the HMRC you can reclaim things like the letting agent fees, repair costs, as well as council tax payments and other bills (so long as you’re footing them yourself).
What Are The Disadvantages Of A Buy-To- Let Mortgage?
Any potential disadvantages of a Buy-To-Let mortgage can generally be avoided with the help of a mortgage broker, but they can include:
- The tenants falling into arrears or causing damage to the property. A comprehensive insurance policy to guard yourself against these things is definitely recommended!
- Buy-To-Let properties are subject to higher Stamp Duty, so you’ll have to fork out an extra 3% more than if you’d bought a residential property.
- You can’t predict the future (presumably!), so there’s no way to know whether the demand for rental properties will continue at the same pace, or for how long. It’s safe to say the impact that Brexit, the pandemic and the rising cost of living will have on the market in the long term is still uncertain!
Where Can I Find A Buy-To-Let Mortgage?
My advice when it comes to finding the best lender for a BTL mortgage is the same as for any other type of mortgage:
Go and speak to a broker!
There’s no harm in perusing online price comparison sites or popping down to your bank – but you’re not necessarily going to find the best deal that way.
A mortgage broker, like the experts at More Than Money, have access to lenders you won’t find on price comparison sites, and will be able to find a mortgage product that properly suits your needs, saving you time and effort as well as potential money.